Whenever it comes to financial emergency, personal loans come up as the preferred choice of many due to its flexible end use, easy application, attractive interest rates, various repayment options, minimum documentation and quick disbursal. A personal loan can be used to deal with innumerable situations like a medical emergency, wedding, long- due vacation, home renovation, etc. Since it is an unsecured loan, the bank does not ask for any collateral against the loan and hence levies fees and charges along with the interest rate on a personal loan.
Before you opt for a personal loan, it is important for you to understand the fee and charges associated with it so that you can make a budget and plan accordingly. Also, you should know about how much amount would you be repaying each month in the form of EMI so that you don’t borrow more than your repayment ability. Here are the charges that incur in a personal loan:
- Interest Charges: Personal loan is an unsecured loan, the interest rate charged on it is slightly higher as compared to a home loan or a car loan. The interest rate of a personal loan starts from 10.99% p.a. and goes upto 24% p.a which is paid in Equated Monthly Instalments (EMIs) until the tenure ends. The interest rates of two individuals may vary from each other as the lenders take various factors like an individual’s age, credit score, employer, repayment history, etc. into consideration before finalizing the interest rate.
- Processing fees: The processing fee covers the administrative costs that bank has to bear at the time of approving and processing your loan application. The processing fee is usually minimal and varies from 0.5% p.a. to 3% p.a. of the total loan amount. You can either get this fee deducted from the loan amount or can pay it upfront. Also, processing fee is non- refundable by most of the banks, which means the lenders will not refund it even when the loan gets cancelled after sanction.
- Goods and Services Tax: Currently, 18% GST is applicable on all loan- related services like prepayment and part-payment charges, processing fee, cancellation charges, duplicate statement issuance charges, etc. However, it is important to note that GST does not apply on interest charges.
- EMI bounce charges: Banks allow you to choose the desired tenure and repay the loan amount in EMIs till the end of the tenure and it is your responsibility to repay the loan every month on time. If you fail to do so, you may have to pay a penalty that would be an additional charge. Therefore, before opting for a personal loan, it is important to analyze your monthly expenses and check if you will be able to pay a certain amount every month.
- Prepayment/Foreclosure charges: You opt for a personal loan when there is an emergency and you are short on money, but when the situation gets better or your salary increases, you can prepay your personal loan before the tenure ends. However, most of the banks have a lock-in period that varies from 6 to 12 months. It means you cannot prepay the personal loan before you pay the EMI for that particular duration. Also, there is a prepayment fee charged by the lenders that varies from bank to bank.
- Loan cancellation charge: In case you have changed your mind and wish to cancel your personal loan after the approval or disbursal of loan amount, the lender may ask you to pay the loan cancellation fee. A bank may either charge a flat cancellation fee along with 18% GST or may charge the applicable interest payment from the day the loan was disbursed to the day it got cancelled. Also, the bank might also not refund the processing fee. Therefore, it is advisable to consider all the factors and think before applying for a personal loan as cancellation comes with its own demerits.
- Repayment mode swapping charges: If you plan to change your personal loan repayment mode (let’s say from auto- debit to cheque or vise- versa), you will have to pay a charge. Lenders may charge somewhere around Rs. 500 plus 18% GST every time you swap the repayment mode during your loan tenure.
- Duplicate documentation charges: Some of the banks charge a fee of Rs. 50 to Rs. 500 plus 18% GST to reissue the loan- related documents like index, statements, NOCs, amortization, etc. The bank may also charge you a small fee for providing you the information regarding the outstanding loan amount.
- Other charges: There can be other charges also that may vary from lender to lender. These charges can be legal or stamp duty charges.
The above mentioned points will give you complete clarity on all applicable fee and charges on a personal loan and hence will help you to borrow the right amount and choose an appropriate tenure as per your repayment ability.