Goods and Services Tax (GST) has been applicable in India since July 1, 2017 and applies to various goods and services, including financial products like personal loans. Whether you are servicing a personal loan or are planning to avail one, knowing which fees and charges attract GST can help you in evaluating its true cost more accurately.
Personal Loan Fees & Charges That Attract GST
There are various fees and charges associated with a personal loan. Some attract GST and some don’t. The ones on which GST is applicable are listed as below:
Late Payment Fees: When personal loan borrowers miss their EMI payments, lenders levy a penalty in the form of late payment fees, also referred to as penal charges. As GST is levied on this penalty amount, the cost of the overdue EMI further increases and also the debt burden for borrowers.
Part Prepayment or Foreclosure Charges: RBI has barred banks from levying prepayment or foreclosure charges on floating-rate retail loans including personal loans. However, for fixed-rate personal loans, lenders have the choice of levying these charges. As these charges are also subject to GST, borrowers servicing their fixed-rate personal loans should plan their finances accordingly as the GST would further increase the overall cost of prepaying or foreclosing the loan.
Loan Cancellation Charges: Banks and NBFCs may levy loan cancellation charges when the applicant cancels his/her loan request. This incidental charge also attracts GST.
Repayment Mode Swapping Charges: Every time a borrower changes the mode of repaying their personal loan, repayment mode swapping charges are levied.
Effect of GST on Personal Loan Borrowers
It increases the total cost of your personal loan. Various personal loan fees and charges are subject to GST, which can increase the overall cost of availing a personal loan. So, for instance, the processing fee applicable on your personal loan is Rs 15,000, which would attract an additional GST amount of Rs 2,700, increasing the processing fee to Rs 17,700.
Ways to Reduce GST on Personal Loans
It is impossible to avoid GST on your personal loan fees and charges, However, you can reduce the cost in the following ways:
Compare Processing Fees: The processing fees on personal loans may vary across lenders. To pay zero or the least amount, visit online financial marketplaces like Paisabazaar.com to compare processing fees along with other loan features such as interest rates, loan amounts, tenure, etc. by various banks and NBFCs.
Compare Prepayment/Foreclosure Charges: Consumers who know they will be able to prepay their personal loans in future, even before availing it, must look for offers at floating rate of interest as such loans won’t attract prepayment/foreclosure charges. They can also apply with lenders offering minimal prepayment/foreclosure charges on their personal loans.
Conclusion
The GST may increase the upfront costs of a loan due to processing, incidental charges and other service-related fees, but considering it beforehand can help you in determining the exact cost of your borrowing and help you in making more informed choices.