You must have heard of personal loans early on in your life. In earlier times, you could only apply for them at a bank. And it took months for loans to approve and process. However, with new-age lending systems in place, taking a personal loan has today become way more manageable and fast. 

Again, personal loans are a preferred choice for borrowers because of many reasons like flexible end-usage, attractive interest rates, minimum documentation, and various repayment options over and above quick and easy disbursals. With quick access to them, you can now use the funds from a personal loan in an emergency. Online loan apps have made it even more convenient to avail of personal loans.

You can take a personal loan for various reasons like a wedding, medical emergency, home renovation, vacation, etc.

However, there has always been a considerable cost associated with taking personal loans. Apart from the interest paid towards a loan, there can be other charges like processing fees, stamping charges, EMI collection charges, prepayment charges, EMI bounce charges, etc.

So, it is natural for one question to arise in the mind of a responsible borrower—what is the actual cost of the loan? Find the answer in the write-up below.

Interest charges on principal make up the major part of personal loan cost

Of course, the interest you pay on the loan amount you borrow carries the maximum weight of the total loan cost. 

Again, since a personal loan is an unsecured loan, the interest rate is a bit higher than a car loan or a home loan. The personal loan interest rate starts anywhere around 11% and can be as high as 35%. You can choose a loan tenure of your choice and repay your lender in affordable EMIs. 

The interest rate offered by the lender depends on your age, repayment history, credit score, employer, etc. factors.

Apart from interest charges, processing fees make up a substantial portion of all the costs involved in availing of a personal loan. So, let’s unearth it.

What is a processing fee?

Lenders incur administrative costs at the time of processing and sanctioning a loan. They charge a percentage or amount of processing fee towards the cost incurred in processing a loan. The loan agreement mentions the terms of the processing fee. It typically includes document handling charges, administrative expenses, credit checks, etc. 

The processing fee covers all the administrative costs the lender had to bear for approving, processing, and sanctioning your loan application. The processing fee is minimal and varies from lender to lender.

What is the typical processing fee amount?

The personal loan processing fee is usually small. It typically varies between 0.5% to 6% of the total loan amount. The minimum processing fee charged is about ₹500.

For example, if you take a loan of ₹1,00,000 and the processing fee charged is 4% on your loan amount, you have to pay a processing fee of ₹4,000. GST is also calculated over the processing fees. 

Online lenders charge a processing fee varying from 2% to 6% of the loan amount or ₹500, whichever is higher.

How is a processing fee charged?

The processing fee is charged for processing your loan application. Lenders can ask you to pay the processing fee upfront before the loan is sanctioned. While some lenders may refund your processing fees if your loan is not processed, most lenders would not refund it. The processing fee is usually non-refundable.

Online loan apps usually deduct processing fees from the loan amount before disbursing the loan. So, you get a loan amount lower than what you applied for. That is why knowing charges such as processing fees beforehand is a smarter way than discovering them upon loan disbursal.

A processing fee is charged as a percentage of the loan amount when you submit your loan application with other documents. Banks mostly offer big loan amounts and charge a processing fee rate of around 1-2%. On the other hand, online loan apps offer small-ticket loans with a processing fee of 3-6% of the loan amount.

Now, let us understand how the actual cost of a personal loan is calculated.

What is the actual cost of a personal loan?

You must have wondered at some point during taking a loan what the actual cost of your loan is? You repay the principal loan amount and interest in the form of EMIs every month until your tenure ends. Apart from them and the processing fees, you would also be paying a few other charges. 

Below are those other charges that make up the actual cost of a personal loan:

  • Prepayment charges: Most lenders allow you to prepay your loan before your loan tenure ends. However, the lenders have a lock-in period, which is usually from 6 to 12 months. You cannot repay your loan right after taking it. You would have to wait and pay the EMI during the lock-in period before getting free of the loan. Prepayment charges vary from lender to lender and can be 2 to 5% of the outstanding loan amount.
  • EMI bounce charges: In case you miss paying an EMI, you are charged with EMI bounce charges that can be around ₹500.
  • Repayment mode swapping charges: If you want to change your loan repayment mode in the middle of your loan, you would have to pay a cost. Lenders may charge around ₹500 plus GST for each swap of the repayment mode.
  • Loan cancellation charge: If you change your mind after the approval or disbursal of your loan and cancel your loan, the lender can ask you to pay a loan cancellation fee. Your loan won’t be treated for foreclosure here. A lender may either charge a flat cancellation fee with GST or interest payment from the day of disbursal of the loan until the day it got canceled.
  • Duplicate documentation charges: Banks may charge a fee of ₹500 plus GST to reissue the loan-related documents such as statements, index, amortization, NOCs, etc. The lender may also charge a small fee for providing you with the information on your outstanding loan amount.
  • Goods and services tax: Currently, the GST applicable on loan-related services such as processing fees, loan cancellation charges, prepayment and part-payment charges, duplicate statement issuance charges, etc., is fixed at 18%. However, note that GST is not applicable on interest charges.
  • Other charges: Many additional charges can vary from lender to lender, like stamp duty or legal costs borne by the lender.

Conclusion

When you consider all of the charges mentioned above apply to your loan, you get the actual cost of your loan. Therefore, it is vital to get complete clarity on all the applicable fees on a personal loan before availing one. This information will help you borrow the right loan amount and choose a fitting tenure according to your repayment ability.

Anil Sumra

Anil Sumra is a Digital Marketing Expert with more than 10 years of experience. He loves to write on various financial topics online to create financial awareness. He holds a bachelor’s degree in Finance & Management.

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