Personal Loan Fees and Charges - Costs to Know Before Borrowing

Shivam had taken a personal loan to buy equipment for his home office so he could pursue higher-paying assignments as a freelance designer. He knew that the loan EMIs wouldn’t affect his monthly budget very much. He figured he could always pay more than the minimum once the money started rolling in.

A few months down the road, he received a large payment and decided to pay off the remaining loan amount in full. After transferring the payment to his loan account, he forgot all about it until receiving a notice from the bank saying his loan was overdue!

Here’s what happened – When Shivam prepaid his pending loan, he forgot to account for personal loan charges such as the pre-closure and prepayment penalties mentioned in the fine print. As a result of these being added to his dues, the loan remained active.

Since he stopped checking the account after the final payment, Shivam did not realise this small amount remained to be paid. It even incurred additional late payment charges!

What is the moral of the story? Always double-check personal loan fees before signing up or even applying for one.

Watch for These Personal Loan Charges & Fees

Be sure to keep an eye out for any hidden charges that could end up costing you more than you bargained for. Let's break down these not-so-obvious loan charges to help you navigate the personal loan process with confidence.

1. Processing Fees & GST

   In addition to GST, lenders either charge a personal loan processing fee upfront or deduct it from the loan amount before disbursal. This fee is usually non-refundable even if your loan application is not approved. So, get it in writing if a lender claims they refund it.

2. Verification Charges

   Before granting a loan, a bank must ensure that you can return it. To verify this, the bank frequently uses an independent firm to investigate your credit ratings and payback history. The verification charge is charged to cover the costs of confirming these facts. The applicant is liable for paying this fee because it is an additional cost for the bank.

3. Cancellation/Foreclosure Charges

   Cancelling your loan or paying it off early, as Shivam did, involves penalties and charges. You may also be charged extra for requesting a duplicate statement at any point or asking for an NOC/no dues certificate after paying off the loan.

4. Prepayment Penalties

   Even if you aren’t paying off the loan in full, be careful about paying anything more than your EMI. Banks lose out on interest they could have earned on the extra money you spend. To make up for it, they can charge you 2-5% of the outstanding loan amount.

5. Late Payment Charges

   This is one of the most common traps that people fall into with personal loans, credit cards and other loan instruments. Late payment fees for EMI could be 2-3% of your EMI amount. Also, you are charged additional interest on the late fee at a much higher rate than your loan!

6. Annual Interest Rates

   With a traditional personal loan, the annual interest rate charged by the bank remains the same throughout the tenure of the loan. This is unlike a personal line of credit, where you may pay lower interest depending on the EMI tenure you choose for each spend.

7. Fees for Duplicate Statement

   Banks often charge a fee to generate a duplicate statement of your loan payment schedule and outstanding balance. This cost ranges typically between Rs.200 and Rs.500, although it may vary depending on the bank.

8. Loan Cancellation Charges

   So, if you ever find yourself in a scenario where you wish to cancel a loan after it has been approved and issued to you, bear in mind that there is typically a cost involved. The cancellation cost varies from one bank or NBFC to another. Usually, it costs roughly ₹1000 each instance.

9. Cheque Dishonour Charges

   When your cheque fails, you may be penalised up to ₹450 per time. The amount varies per lender, and some may levy larger dishonour fees for repeated occasions.

How to Avoid Unnecessary Personal Loan Charges?

To avoid unwanted personal loan costs, you can do the following:

• Do Your Research: First, compare different lenders. Take the time to investigate and choose the one with the lowest fees and interest rates.
• Read Your Agreement: Next, make sure you read all of the fine language in your loan agreement. Understanding each fee and term is critical.
• Maintain a Healthy Credit Score: Maintaining a solid credit score is vital since it allows you to negotiate better conditions, which leads to cheaper expenses.
• Don’t Miss EMIs: Try not to miss any EMI payments. Paying on time helps you avoid late payment charges entirely.
• Plan Your Prepayment: Planning for prepayments is also essential. Doing so can reduce future prepayment penalties.
• Negotiate: Don't be afraid to haggle with your lender. They may be prepared to lower or even waive some loan charges if requested respectfully!
• Be Aware: Finally, remaining updated about any processing fee and regulatory changes that may affect loan costs is critical!

FAQ

1. What are the charges typically associated with personal loans?

   When you are thinking about getting a personal loan, there are several costs and expenses you should be aware of. These may include processing fees, prepayment charges, EMI late payment charges, and, of course, loan interest.

   It's crucial to know that these costs might vary depending on the loan you choose. So, before proceeding, be sure you thoroughly review everything in the loan agreement!

2. How do lenders calculate processing fees, and are they typically flat rates or percentages of the loan amount?

   The loan processing fee is normally approximately 2.5% of the entire loan amount. It's a small proportion, but one to be mindful of!

3. What factors might influence the total processing fees charged by lenders?

   Several factors can determine how much lenders charge in total processing costs, such as:

   • Higher loan amounts may result in greater processing fees.
   • Different lenders have their own fee structures and rules, which affect the total cost.
   • Furthermore, an applicant's credit score might impact the costs. Lower scores may result in more significant charges and vice versa.
   • The loan period is critical - Longer repayment terms may result in higher processing fees.
   • Suppose you are an existing client of your bank. In that case, you may benefit from special rates because of your association with the lender.
   • Market circumstances and competition among lenders can also have an impact on the ultimate loan charges.
   • Finally, keep in mind that different sorts of loans (such as personal, house, and auto) carry different fees.

4. Are there specific laws or regulations that govern how personal loan fees are disclosed to borrowers?

   In India, personal loan costs are controlled by the Reserve Bank of India (RBI) and the National Home Bank (NHB) for home financing businesses. Lenders must obey the Fair Practices Code, which requires them to disclose all costs to borrowers fully.

   Furthermore, under the Consumer Protection Act of 2019, lenders must provide clear and complete information regarding loan conditions and costs as part of consumer protection laws. These restrictions exist to safeguard borrowers and guarantee they receive comprehensive and honest information about the expenses associated with personal loans!