A Personal Loan’s Actual Cost
You’ve probably heard of personal loans at some point in your life. Previously, you could only apply for them at a bank. It also took months for loans to be approved and processed. However, with modern financing mechanisms in place, obtaining a personal loan has become far more simple and quick.
Personal loans are a popular choice among borrowers for a variety of reasons, including flexible end-use, low-interest rates, minimal documentation, and a variety of repayment alternatives, in addition to quick and uncomplicated disbursals. You can now use the money from a personal loan in an emergency because you have immediate access to them. Personal loans are now increasingly easier to obtain thanks to online loan apps.
A personal loan can be used for a variety of purposes, including a wedding, medical emergency, home remodeling, vacation, and so on.
Personal loans, on the other hand, have traditionally come with a hefty price tag. Aside from the interest paid on a loan, there may be extra expenses such as processing fees, stamping fees, EMI collection fees, prepayment fees, EMI bounce charges, and so on.
The majority of a personal loan’s cost is made up of interest charges on the principal
Naturally, the interest you pay on the loan amount you borrow has the greatest effect on the entire loan cost. The personal loan interest rates are slightly higher than on a car or home loan because it is an unsecured loan. The interest rate on a personal loan starts at roughly 11 percent and can go up to 35 percent. You have the option of choosing your loan term and repaying your lender in manageable EMIs.
The borrower’s interest rate is determined by your age, repayment history, credit score, employment, and other considerations.
Processing fees, in addition to interest rates, make up a significant chunk of all the costs associated with obtaining a personal loan.
What is a processing fee?
When a loan is processed and sanctioned, the lender incurs administrative fees. They charge a processing fee in the form of a percentage or a fixed amount to cover the costs of processing a loan. The processing fee is specified in the loan agreement. It usually includes document handling fees, administrative costs, and credit checks, among other things.
The processing fee covers all of the costs incurred by the lender in approving, processing, and sanctioning your loan application. The processing charge is low and varies depending on the lender.
What is the typical processing fee amount?
The processing cost for a personal loan is usually low. Typically, it ranges from 0.5 percent to 6% of the overall loan amount. The minimum processing fee is approximately ₹500.
For example, if you borrow ₹1,00,000 and the processing fee is 2% of the loan amount, you will be charged a processing fee of ₹2,000. The processing fees are also subject to GST.
How is a processing fee charged?
The processing fee is applied to the time it takes to process your loan application. Lenders may require you to pay the processing fee in advance of the loan being approved. If your loan is not processed, some lenders may return your processing charges, but most lenders will not. In most cases, the processing charge is non-refundable.
Before disbursing a loan, most online loan applications remove processing costs from the loan amount. As a result, you receive a loan amount that is less than what you requested. As a result, knowing about fees like processing fees ahead of time is preferable to discovering them after the loan has been disbursed.
When you submit your loan application along with accompanying papers, you will be charged a processing fee that is calculated as a percentage of the loan amount. Banks typically provide large loan sums and impose a processing fee of 1-2 percent. Online loan apps, on the other hand, provide small-ticket loans for a fee of 3-6 percent of the loan amount.
How much does a personal loan cost in reality?
You must have pondered what your loan’s true cost is at some time during the application process. EMIs are used to repay the principal loan amount as well as interest on a monthly basis till your term ends. You’ll have to pay a few more fees in addition to them plus the processing fees.
Other fees that go into the total cost of a personal loan are listed below:
Prepayment charges:
Most lenders allow you to pay off your loan early before the term expires. Lenders, on the other hand, have a lock-in term that ranges from 6 to 12 months. You will not be able to repay your loan immediately after receiving it. Before you may get out of the loan, you must wait and pay the EMI during the lock-in term. Prepayment penalties vary per lender and might range from 2 to 5% of the outstanding loan balance.
Charges for switching payment modes:
You will have to pay a fee if you want to modify your loan repayment mode in the midst of your loan. For each change in repayment mode, lenders may charge about ₹500 + GST.
EMI bounce charges:
If you skip an EMI payment, you will be charged EMI bounce charges, which can be as much as ₹500.
Loan cancellation charge:
If you decide to cancel your loan after it has been approved or disbursed, the lender may charge you a loan cancellation fee. Your loan will not be foreclosed on here. A lender can levy a flat cancellation fee plus GST or interest from the day the loan was disbursed to the day it was canceled.
Duplicate document charges:
To reissue loan-related documents such as statements, index, amortization, NOCs, and so on, banks may impose a cost of ₹500 + GST. A minor fee may be charged by the lender for providing you with information on your outstanding loan balance.
Goods and Service taxes:
The GST rate on loan-related services, such as processing costs, loan cancellation fees, prepayment and part-payment fees, duplicate statement issuing fees, and so on, is currently set at 18 percent. Interest charges, on the other hand, are not subject to GST.
