A personal loan is a quick and easy way to get funds when needed. Whether it’s for a medical emergency, wedding, home renovation, or travel, a personal loan helps you cover expenses without pledging any security. But while applying for a personal loan, most people only focus on the interest rate. However, banks and financial institutions also apply various other charges, which can increase the overall cost of the loan.
If you don’t pay attention to these hidden costs, you may end up paying much more than expected. Let’s understand the different charges on personal loans and how they can impact your finances.
1. Processing Fee – The First Deduction from Your Loan
When you apply for a personal loan, banks and NBFCs (Non-Banking Financial Companies) charge a processing fee for handling your loan application. This is a non-refundable charge deducted before you receive the loan amount.
- Amount Charged: Usually 1% to 3% of the total loan amount
- Example: If you take a ₹5 lakh loan and the processing fee is 2%, then ₹10,000 will be deducted, and you will receive only ₹4,90,000.
Even if your loan application gets rejected, this fee is non-refundable. So, before applying, always check the processing fee charged by different lenders.
2. GST on Processing Fees – An Extra Cost Many Forget
In India, financial services attract GST (Goods and Services Tax). A GST of 18% is charged on the processing fee of your personal loan.
- Example: If the processing fee is ₹10,000, then the GST will be ₹1,800, making the total cost ₹11,800.
Many borrowers don’t consider this additional tax, which increases the cost of taking a loan.
3. Prepayment Charges – A Penalty for Paying Early
Sometimes, you may want to repay your loan before the tenure ends to save on interest. However, most banks and NBFCs charge a prepayment penalty if you do so.
- Prepayment Charges: 2% to 5% of the outstanding loan amount
- Condition: Some banks do not allow prepayment within the first 6 to 12 months of taking the loan.
How It Affects You?
If you take a ₹5 lakh loan and after 2 years, you have ₹3 lakh outstanding, and the prepayment charge is 3%, then you will have to pay ₹9,000 extra for closing the loan early.
Before prepaying, always check whether the amount you save on interest is higher than the penalty you pay.
4. Late Payment Fees – Cost of Missing an EMI
If you miss an EMI (Equated Monthly Installment) payment, lenders charge a late payment fee, which can significantly increase your financial burden.
- Charges: 2% to 3% of the overdue amount or a fixed penalty per EMI
- Effect on Credit Score: Late payments are reported to credit bureaus, which reduce your credit score and affect your ability to get future loans.
Example:
If your EMI is ₹10,000 and the late payment charge is 3%, you will have to pay an additional ₹300 plus applicable GST.
Always set reminders or opt for auto-debit to avoid missing EMI payments.
5. Loan Cancellation Charges – Cost of Changing Your Mind
After loan approval, if you decide not to take the loan, the bank may charge a loan cancellation fee.
- Cancellation Fee: ₹2,000 to ₹5,000, depending on the lender
- Refund Policy: The processing fee is not refunded even if the loan is canceled.
So, think carefully before applying for a personal loan to avoid unnecessary expenses.
6. Documentation and Stamp Duty Charges
Some banks charge documentation fees for processing legal formalities, and some states have stamp duty charges on loan agreements.
- Documentation Fees: ₹500 to ₹2,500 (varies by lender)
- Stamp Duty: 0.1% to 0.2% of the loan amount in some states
These charges may not be significant but still add to your loan cost.
7. EMI Bounce Charges – Heavy Penalty for Failed Payments
If your EMI auto-debit fails due to insufficient balance, the bank charges an EMI bounce fee.
- Charges: ₹500 to ₹1,500 per bounced EMI
- Additional Charges: Your bank may also charge a penalty for failed auto-debit transactions.
If you frequently miss EMIs, it can affect your credit score and make it harder to get loans in the future.
8. Loan Restructuring Fees – When You Modify Loan Terms
If you are unable to pay EMIs on time and request the bank to restructure your loan, they may charge a loan restructuring fee.
- Charges: ₹2,000 to ₹5,000 or 1% of the outstanding loan amount
Loan restructuring may also increase the total interest you pay in the long run.
9. Verification and Legal Fees
Some lenders charge verification fees for checking your documents and credit history. If a personal guarantor is involved, legal fees may also be applicable.
- Verification Fee: ₹500 to ₹2,000
- Legal Fee: ₹1,000 to ₹5,000 (if applicable)
How to Avoid These Hidden Charges?
- Compare different lenders – Choose a bank with lower fees and flexible prepayment terms.
- Negotiate processing fees – Some banks may waive or reduce these charges for good customers.
- Read the loan agreement carefully – Check for hidden charges before signing.
- Maintain enough balance for EMI payments – Avoid bounce charges by keeping funds in your bank account.
- Use a loan EMI calculator – Calculate total loan costs, including hidden charges, before applying.
Final Words
A personal loan may look affordable based on the interest rate, but extra charges can increase your financial burden. Always check these costs before taking a loan to avoid surprises.
By being aware of these charges, you can make better financial decisions and choose a loan that truly fits your budget.
