Personal loans serve as a quick and non-collateral financial tool for borrowers. Whether it’s for an emergency, holidays, or a big purchase, they provide a bit of extra financial flexibility when buying products or services with one’s own funds may be out of question.
But beneath the simplicity of easy and quick disbursal lies a complex maze of hidden costs that can sometimes quietly add up to the overall borrowing cost.
So, here are 12 of the most common charges you might incur with personal loans, and what they mean for your wallet.
1. Processing Fees
Every loan application involves administrative work. Banks recover this by way of a processing fee, either charged upfront or deducted from the disbursed amount. This fee can be flat or percentage-based, often ranging up to 5 per cent of the loan value. For instance, a Rs 1 lakh loan with a 2 per cent fee would cost Rs 2,000 right at the start. Some lenders waive or reduce this fee for borrowers with strong credit or during promotional offers.
2. Verification Charges
To assess a borrower’s eligibility, lenders pull credit reports and verify financial documents. This background check incurs a cost, passed on as verification charges to borrowers. While typically smaller than processing fees, they add to the upfront cost of borrowing.
3. EMI Collection Charges
If a borrower opts for physical EMI cheque collection instead of automated bank debits, banks may charge a service fee. This is usually levied on a per collection basis and applies whether the cheque is collected from home or office.
4. EMI Bounce or Dishonour Charges
A missed EMI, due to insufficient funds or a bounced cheque, results in penalty charges. These fees are applied each time a payment fails, and repeated instances can damage your credit score. It's advisable to maintain a sufficient balance in the linked account to avoid these penalties.
5. Late Payment Penalties
Missing the EMI due date attracts a late fee, often a fixed charge or a percentage of the overdue amount.
Even a delay of a few days can trigger this penalty, while simultaneously damaging your credit score. So, timely payments are critical to avoid extra costs and preserve your creditworthiness.
6. Repayment Mode Change Fees
Changing the EMI repayment method, such as switching to a different bank account or altering the debit date, isn’t always free. Most lenders charge a fee per change, which varies depending on the bank’s internal policies.
7. Partial Repayment Charges
Pre-paying over and above the regular EMI lowers the loan tenure and the overall interest outgo. But banks might charge a fee for early repayment. The fee is typically a percentage of what is paid, and there are often restrictions, like having to wait (e.g., for 12 months following loan disbursement) or limits on how often and how much you can pay in advance.
8. Foreclosure Charges
If you want to pay off the full loan before the end of the mortgage term, that’s considered a foreclosure. Although this has the effect of lowering the overall interest, there is a penalty for early closure of the loan, typically a small percentage of the value of the remaining loan. These fees are intended to cover the interest revenue that the bank forfeits.
9. Duplicate Statement Fees
Need a second copy of your loan statement? Most lenders will provide it, but at a price. Whether it's a physical printout or a formal digital version, duplicate statements often come with a nominal charge.
10. Cash Transaction Charges
Some borrowers prefer paying EMIs in cash at the bank. While there's no harm in doing so, these transactions typically carry a fee per visit, especially in urban branches, where digital payments are the norm.
11. Loan Cancellation Charges
Borrowers can revoke a loan soon after it is sanctioned. But you might have to pay a cancellation fee for that. And although some banks offer a “free look” period (typically 15 days) without penalty, others deduct interest for the time you’ve had the money. Processing fees, stamp duty and taxes, in most situations, are not refundable.
12. GST on All Charges
All personal loan-related charges, from processing fees to penalties, are subject to 18 per cent Goods and Services Tax (GST). This tax is collected by the lender and remitted to the government, adding a further layer of cost to the loan for the borrower.
