Personal loans are a great way to consolidate debt, make home repairs or renovations, pay for college, or start a new business. But it also comes with some extra fees and charges that you should know about before you apply.
Some lenders are upfront about personal loan charges and how they are added to your account, while others are not. You should ask your lender about any of these charges to decide whether they’re right for you.
What is a personal loan?
A personal loan is an unsecured loan. This means that the lender has no collateral in case you default on your payments. Personal loans are used by people to pay for a variety of things, such as education, home improvement, and debt consolidation.
These loans usually have more competitive interest rates than other loans because they’re considered high-risk credit that doesn’t involve any collateral from the borrower. However, some lenders will offer lower rates if you have a good credit score or other factors showing that you can afford to pay back your debt on time.
Processing Fee for Personal Loan
Processing fees are the personal loan charges associated with applying for a loan, such as the credit check and other associated expenses incurred for processing your loan application. The cost of these processing charges can range from 0.5% to 3% of the loan amount, but as a general rule, it’s best to expect anything between 1% and 2% on top of your initial loan amount to get your money released.
The processing fee for a personal loan is usually charged at the time of loan approval, meaning that you’ll only have to pay this fee once instead of each time a new payment is made.
A bank needs to verify your identity because, if something goes wrong, it will be much easier for them to recover their money from you if they have proof that it was indeed you who took out the loan and not someone else using your name.
The amount should be paid when you apply for your loan. If there is any delay in paying these personal loan charges, then chances are that it might result in delays in getting approved as well.
If you pay off your loan before the end of its term, you may be charged a prepayment fee. The amount of the prepayment fee and when it can be applied will depend on the lender and the time of loan closure. These personal loan charges are usually calculated as a percentage of what you’re paying back early, so if it’s only a few thousand rupees that you want to get rid of early, then it won’t cost much. Though some banks don’t charge prepayment fees to their customers.
Duplicate Statement Fee
By default, the lending financial institute sends its borrower a statement with all details of the EMI, interest rate, loan amount, loan account number, etc. The borrower should keep this statement carefully for further reference. If the borrower misplaces it, the lender may charge a fee to provide a duplicate statement.
Sometimes, applicants need a statement of EMI break-up for taxation purposes, which may or may not be charged by lenders.
Penalty Charges or Bounce Charges
These personal loan charges accrue when your cheque is returned by the bank and the lender does not receive the EMI. The most common reason for a bounced payment is that you don’t have enough money in your account to cover the cost of the repayment EMI.
A penalty charge is a fee or surcharge you can be charged for late repayment of your loan. In India, penalties are fixed as well as a percentage depending on the outstanding amount. The way these personal loan charges are calculated varies from lender to lender, so it’s important to check with your bank before signing up for anything that might cause you financial pain down the track.
A foreclosure charge is a fee charged by most lenders if the borrower does not pay back the loan according to the terms and conditions. These personal loan charges are usually calculated as a percentage of your outstanding balance. There is not much difference between prepayment and foreclosure charges.
Swapping of Repayment Mode Charges
If you wish to change your repayment mode or change the bank from which your EMI is deducted, the bank may charge you a fee. The fee ranges between Rs 500 and Rs 2,000, depending on the bank you are switching to. These personal loan charges may apply in the event of a change of mandate as well. This is the fee that you need to pay if you only want to change your repayment mode.
Loan cancellation charges
If, after processing the application and sanctioning the loan, you decide not to take it, the lender may impose a nominal fee for loan cancellation. It is irreversible if the loan amount is credited to your bank account.
The amount of such personal loan charges may vary from bank to bank. It is usually around Rs. 500 to Rs. 1000.
Duplicate No Due Certificate Charge
The No Objection Certificate (NOC) is a certificate issued by the bank to confirm that the loan amount has been repaid. The lender issues this certificate without initially charging any fee. But if the borrower misplaces it and demands a duplicate NOC, a lender may ask for an extra fee of around Rs. 500 to accomplish that.
GST charges apply to all types of charges, according to the guidelines. A penalty or fee charged to you by your lender may be considered a taxable service and, thus, will attract GST.
GST is 18% of the total amount you have to pay, which includes any processing fees or other costs you may have to pay for your personal loan.
Remember, personal loans are a popular way to borrow money, and they can be a great option if you have low credit. But you must understand the fees and personal loan charges before signing up for one. The last thing you want is an unexpected fee or surprise charge on top of everything else in life!