Top 12 charges in personal loans you should know about

A personal loan can help you meet various objectives. On one hand, it can help you overcome any medical or other emergency. On the other hand, it can help you celebrate occasions like family functions and festivals, or enjoy a much-deserved family vacation. 

It can also help you buy gadgets, consumer durables, etc., that provide convenience and help improve the quality of your life. However, personal loans come with various fees and charges. In this article, we will understand the various fees/charges in a personal loan.

Fees/charges in a personal loan

Some of the fees/charges in a personal loan include the following.

1. Processing fees

Banks have to incur certain administration expenses to process the personal loan or any other loan application. These charges are levied in a loan in the form of processing fees. The processing fee is usually charged upfront at the time of personal loan application or deducted from the loan amount at the time of disbursement.

The processing fee may be charged as a flat amount or a percentage of the loan amount. For example, if the processing fee is 2% of the loan amount and the loan amount is Rs. 1 lakh, the processing fee charged will be Rs. 2,000.

Some banks may offer a discount or waive the processing fee. The discount/waiver may be part of a limited-time offer based on your good credit score, relationship with the bank, etc. While discussing the personal loan with the bank, you may negotiate for a discount/waiver of the processing fee.

Usually, the processing fee is up to 5% of the loan amount.

2. Verification charges

To assess the borrower’s credit worthiness, the bank has to check their credit score and report. It needs to verify the borrower’s credentials. All this comes at a cost to the bank, which is passed on to the customer through verification charges.

3. EMI pick-up/ collection charges

Sometimes, the borrower may want the bank executive to pick up the EMI cheque from their residence or office. While the bank may offer such a service, it may charge an EMI pick-up or collection charge. The charge is levied on a per-instance basis.

4. Payment return charges/ EMI dishonour/ Bounce charges

The personal loan EMI is usually debited from the borrower’s savings account through an auto-debit mandate. However, the payment can also be made through cheque. If the payment is returned due to EMI or cheque dishonour, the bank levies a payment return charge. The fee is levied on a per return instance.

5. Penalty on EMI delay/default

The bank will share the EMI payment schedule with various details, including the EMI payment date. If the EMI is not paid by the due date, the bank levies late payment charges. You should always keep money equivalent to one month's EMI in your savings account from where the EMI is debited to avoid late payment charges.

6. Repayment mode change charges

The bank charges a fee on a per-instance basis for the change in repayment mode (change in bank account for debiting EMI), change in EMI date, etc.

7. Partial repayment charges

If you make an additional payment over and above your regular EMI, your loan will get over earlier than scheduled. In such a scenario, the bank will earn a lower interest amount. To compensate for the lower interest amount, the bank levies a partial repayment charge.

The partial prepayment charge is usually a percentage of the partially repaid loan amount. For example, suppose the loan outstanding is Rs. 1 lakh, and the borrower makes a partial repayment of Rs. 15,000, and the bank charges 2% as partial repayment charges. In this case, the partial repayment charge will be 2% of Rs. 15,000, which is Rs. 300 + Taxes.

The bank may allow partial repayment after a stipulated period. For example, a bank may allow partial repayment only after the loan completes one year. The bank may allow partial repayment of only a specified percentage of the outstanding principal. 

For example, the bank may allow partial repayment of only 20% of the outstanding principal. The bank may allow partial repayment only a specified number of times in a year. For example, the bank may allow partial repayment only once a year.

8. Foreclosure charges

If a borrower receives a lumpsum amount, they may use it to repay the outstanding loan amount and close it earlier than scheduled. It is known as loan foreclosure. A loan foreclosure leads to the bank earning a lower interest amount than they would have earned if the borrower had paid the EMIs as scheduled.

To compensate for the lower interest amount, the bank levies a foreclosure charge. The charge is usually a percentage of the loan amount outstanding.

9. Duplicate statement fees

If you need a duplicate statement with the personal loan details, you may submit a request to the bank. The bank can provide the duplicate statement by levying the statement fee.

10. Cash transaction charges

Sometimes, the borrower may want to pay the EMI in cash at the bank branch. In such a scenario, the bank may levy a cash transaction charge. The cash transaction charge is levied on a per-instance basis.

11. Loan cancellation charges

The borrower has the option to cancel the disbursed loan within a specified timeline from the loan disbursement date. If the borrower decides to cancel the loan, the bank levies a loan cancellation charge. The bank charges the interest from the disbursement date till the loan cancellation date. Also, the processing fee, stamp duty, and other statutory charges, along with GST on these charges, are usually non-refundable.

Some banks may waive the loan cancellation charges if the loan is cancelled within the freelook period. The freelook period is usually up to 15 days from the loan disbursement date.

12. GST on the above charges

An 18% GST is applicable on the various personal loan charges levied by the bank. The bank collects the GST on behalf of the Government and passes it on to the Government.

Why should you be aware of personal loan fees/charges?

The processing fee and the interest amount form the major fees/charges in a personal loan. Apart from these, there are various other fees and charges in a personal loan, which may apply, depending on the situation. Hence, it is important for you to know about the various fees/charges involved in a personal loan to avoid any unpleasant surprises later on.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.