How much does a personal loan actually cost?
If you were unsure about the popularity of personal loans in the country, check out this statistic: the total number of unsecured instalment loans stands at 16 million accounts as of December 2018 with a robust 29.3% YoY growth, according to a TransUnion CIBIL consumer credit report for Q42018. This indicates that unsecured financing facilities bode well with rising aspirations and consumerization appetite of people. The increasing digitalization of loan products is also boosting accessibility in a fiercely competitive market, factors that are contributing to the popularity of personal loans in India.
However, notwithstanding its popularity, a personal loan is still a contoured product with a number of charges, fees and penalties attached to it. While applying for one, factor in these to remain on top of your repayment. Plus, the applicable charges often differ from bank to bank, and from borrower to borrower depending on his/her creditworthiness.
So, let’s discuss the fees and charges attached to personal loans to help you better evaluate how much do they actually cost?
Interest charges
The effective interest charges on a personal loan can range anywhere between 10.99% and 24% p.a. on the amount borrowed to be repaid in equal monthly instalments according to the loan tenure. The upper limit can be slightly higher for non-salaried borrowers. That being said, lenders take into consideration the applicant’s credit score, his/her relationship with the bank and financial stability among other things to determine the applicable interest rate. It’s advisable to get complete clarity on the effective interest rate on the loan you intend to take and evaluate the affordability of its monthly instalments before signing on the dotted line.
Good and Services Tax
The current applicable GST on all loan-linked services is 18%. These services include processing fee, prepayment and part-payment charges, repayment mode swap charges, cancellation charges, missed repayment charges, duplicate statement issuance charges, etc. Do note that GST doesn’t apply on loan interest charges.
Processing fees
Depending on your lender, the loan processing fees can be anywhere between 0.5% p.a. and 3% p.a. on the loan amount plus 18% GST. That means if you’re applying for a Rs 1 lakh loan and the lender is charging 2% processing fee, your total processing fee would be: (2% of Rs. 1L) Rs 2,000 + (GST 18% of Rs 2,000) Rs 360 = Rs 2,360.
Additionally, lenders often cap the processing fee (for e.g. processing fee cannot exceed Rs 10,000). Also, there are some banks that offer personal loans to certain customers without charging any processing fee at all. However, the processing fee is mostly a non-refundable charge which the lenders retain even if the loan is cancelled after sanction.
Prepayment/Foreclosure charges
People are often forced to take a personal loan while tackling an emergency, but when their finances stabilize after some time, they must tackle the challenge of paying interest and EMIs over a long period of time. It’s precisely why a prepayment option comes in handy while repaying a personal loan. However, lenders do charge a prepayment fee to partially compensate for the loss of income due to the loan tenure getting cut short. Plus, most lenders have a lock-in period of 12 months before which you cannot foreclose a personal loan. And after the lock-in period, the prepayment charges can go as high 5% of the outstanding balance+18% GST.
At times, the prepayment charges are lower if it’s closed near to the loan maturity deadline. For e.g. prepayment charge of only 2% of outstanding balance+18% GST will apply if a 48-month loan is pre-closed on the 37th month, but the charge will be increased to 4% of outstanding balance+18% GST if the same loan is pre-closed on the 15th month. Also, some lenders charge a lower interest rate (like 0.65% p.a. on outstanding amount + 18% GST) for fixed-rate personal loans.
Additional interest on late payment and EMI bounce charges
It’ll be worthwhile to re-emphasize the importance of evaluating the affordability of your personal loan EMIs before you take the plunge, as there are hefty charges involved on missed or delayed repayments. A number of lenders levy a 2% to 3% per month or 24% per annum interest charge on the outstanding loan amount as late payment charge. Other banks charge a flat amount (like Rs. 450-500) plus GST for each dishonoured EMI.
Most lenders also charge anywhere between Rs. 50 and Rs 400 plus 18% GST for each EMI bounce irrespective of the repayment mode. These charges can burn a deep hole in the pocket apart from sinking your credit score.
Repayment mode swapping charges
If you change your personal loan repayment mode (say, from cheque to auto-debit), there’s usually charge for that too. Lenders can charge around Rs 500 (plus 18% GST) for every repayment mode swap during the tenure of the loan.
Loan cancellation charge
If you wish to cancel a personal loan after its approval or disbursal, you might have to pay a loan cancellation charge depending on your lender. Some banks charge a flat rate (like Rs. 3,000) + 18%GST if a loan is cancelled. There are others who do not take a flat cancellation fee but will charge the applicable interest payment between the loan disbursal and cancellation day and won’t refund the processing fee. As such, think it through before applying for a personal loan as cancellation can be expensive. Also, you’ll be well-advised not to apply for multiple loans in quick succession as that has some bearing on your credit score.
Duplicate documentation charges
At times banks will charge a fee anywhere between Rs 50 and Rs 500 (plus 18% GST) to reissue loan-linked documents like statements, amortization index, NOCs, Credit Information Companies (CIC) Report, etc.
Other charges
There are some other applicable charges too that differ according to the lender, the borrower’s repayment behaviour, the type of personal loan and even the place where the loan has been sanctioned. These charges include legal charges and stamp duty charges.
As such, the key is reading the loan fine-print and getting complete clarity on all applicable charges and fees before making a decision. Any laxity in personal loan repayment can lead to debt accumulation and adversely impact your credit score. So, be smart when it comes to choosing a personal loan and don’t miss a single repayment.