Understanding the common fees and charges related to Personal Loan

21 MAY, 2020

A personal loan comes as one of the most convenient ways to aid in times of a financial crunch. The funding acquired through this loan can be used to serve different purposes.  Whether it is a dream wedding, home renovation cost, taking a luxury vacation or even buying a consumer durable, a personal loan can help you attain your life goals. It is an unsecured loan and thus, you do not have to provide the issuer with collateral. However, as with every kind of loan, there are fees and charges levied with a personal loan. It is essential to know of the costs that you will incur before you apply for one:

Charges for verification – The bank undertakes verification to understand if you as a borrower have the capacity to repay the loan. For this purpose, they may internally conduct or hire a professional agency to ensure credential verification. Several factors such as your credit score, employment status, and other provided details are assessed. The added costs incurred by the bank are borne by the borrower.

Processing fees – The personal loan goes through several processes during and before approval. This leads to administrative costs and the same is recovered by the bank in the form of processing fees. The fees levied will vary depending on the loan amount and the standard charges applied by the bank.

EMI default penalties – Loan repayment must be done through the EMI. These monthly installments equate the principal and interest amount. Failing to make these repayments in the stipulated time will lead you to incur a penalty. Thus, you must essentially opt for an EMI that you can afford to pay.

Foreclosure and prepayment penalty – As part of the loan, the bank expects you to make repayments in the agreed term. When you prepay the amount or foreclose the loan before the stipulated time, the bank incurs a loss. Pre-paying the loan essentially means that you make more than one EMI payment at a time. Foreclosure involves closing the loan by paying the entire amount in one go.
Issuers usually levy a penalty in both the scenarios. They also have a one year lock-in period, only after completion of this term can you foreclose the entire out-standing amount.

Cancellation costs – If you decide against going ahead with taking a personal loan post the approval of the same, you may be asked to fulfill the cancellation charges. The cancellation fee may include a flat fee or a percentage of the total amount that you wanted to avail of. Additionally, processing fees are non-refundable charges.

Goods and Service tax – GST is usually levied on all the services offered during the loan process. This includes the processing fees, insurance charges, cancellation fees and more.

It is important to understand all the above charges and fees levied on personal loans, to better plan your finances. Despite the costs related to this financial product, it can be beneficially used to serve many purposes.