A personal loan is often considered a quick and convenient way to meet financial needs, whether for medical emergencies, home renovation, education, or debt consolidation. While lenders advertise attractive interest rates, many borrowers overlook the hidden charges that can significantly impact the overall cost of the loan.
Understanding these hidden costs before applying for a loan can help you avoid financial surprises, compare lenders effectively, and minimize unnecessary expenses.
In this blog, we will uncover the common hidden charges in personal loans, how they impact the total loan cost, and ways to reduce them.
1. Processing Fees: The First Deduction from Your Loan
What Is It?
A processing fees is a one-time charge deducted by the lender before disbursing the loan amount. It covers the cost of processing the loan application and documentation.
How Much Do Lenders Charge?
- Banks:5% – 2.5% of the loan amount.
- NBFCs & Digital Lenders: 1% – 4% of the loan amount.
- Some lenders offer zero processing fees for pre-approved loans.
Example
If you apply for a ₹5 lakh personal loan with a 2% processing fee, ₹10,000 will be deducted, and you’ll receive only ₹4.9 lakh in your bank account.
RupeeQ Tip – Before applying, compare processing fees from multiple lenders using RupeeQ to find banks and NBFCs offering the lowest charges.
2. Prepayment and Foreclosure Charges: The Cost of Early Repayment
What Are These Charges?
If you want to close your loan before the full tenure, lenders charge a prepayment or foreclosure fee to compensate for the interest loss.
How Much Do Lenders Charge?
- Public Sector Banks (SBI, PNB): No prepayment charges.
- Private Banks & NBFCs: 2% – 5% of the outstanding amount.
Example
If your outstanding loan amount is ₹3 lakh and the prepayment charge is 3%, you’ll pay ₹9,000 just to close your loan early.
When Can You Avoid Prepayment Charges?
- If your loan has a floating interest rate, RBI mandates no prepayment penalties.
- Some lenders allow partial prepayment after 12 months without fees.
3. Late Payment Penalty: The Cost of Missing an EMI
What Is It?
If you miss an EMI due date, the lender charges a late payment penalty along with additional interest on the overdue amount.
How Much Do Lenders Charge?
- Banks: ₹500 – ₹2,000 per missed EMI.
- NBFCs: 2% – 4% per month on the overdue amount.
Impact of Late Payments
- Affects your credit score negatively, reducing future loan eligibility.
- Increases financial burden with extra penalties.
Example
If your EMI is ₹10,000 and you miss a payment, a 2% penalty means you will pay ₹200 extra per month until you clear the dues.
4. Loan Cancellation Fees: The Cost of Changing Your Mind
What Is It?
If you cancel your loan after approval, lenders charge a cancellation fee to recover processing and verification costs.
How Much Do Lenders Charge?
- Banks: ₹1,000 – ₹5,000.
- NBFCs & Digital Lenders: ₹2,000 – ₹10,000.
Example
If you cancel a ₹3 lakh loan, you may need to pay ₹3,000 – ₹5,000 as a cancellation fee, even if you haven’t received the money.
RupeeQ Tip – Read loan terms carefully before applying. If unsure, compare multiple options on RupeeQ before committing to a loan.
5. Insurance and Loan Protection Charges: Optional or Hidden Cost?
What Is It?
Some lenders bundle loan protection insurance with personal loans to cover repayment in case of death, disability, or job loss. However, this is often added without clear disclosure, increasing your total loan cost.
How Much Do Lenders Charge?
- Insurance premiums vary based on loan amount and tenure.
- Some lenders deduct insurance premiums from the disbursed amount, reducing the loan amount you receive.
Example
If you take a ₹10 lakh loan with a ₹15,000 insurance charge, you may only receive ₹9.85 lakh after deductions.
RupeeQ Tip – Always ask if insurance is mandatory. If optional, check if you really need loan protection insurance before accepting it.
6. Stamp Duty and Legal Charges: Government-Mandated Fees
What Is It?
Some states charge stamp duty on loan agreements, which lenders pass on to borrowers. Legal fees may also be added for processing loan documents.
How Much Do Lenders Charge?
- Stamp duty: ₹500 – ₹2,000 (varies by state).
- Legal charges: ₹1,000 – ₹5,000.
Example
In Maharashtra, stamp duty on personal loan agreements is 0.1% of the loan amount. On a ₹5 lakh loan, the stamp duty would be ₹500.
RupeeQ Tip – Stamp duty is mandatory and cannot be avoided, but legal charges vary. Always clarify with the lender before signing the agreement.
7. Loan Rescheduling or Restructuring Fees: The Cost of Adjusting Repayment
What Is It?
Lenders may offer loan restructuring if you’re struggling with EMIs, such as extending tenure or reducing EMI amounts. However, this service often comes with a restructuring fee.
How Much Do Lenders Charge?
- Banks: ₹2,500 – ₹10,000.
- NBFCs: 1% of the remaining loan amount.
RupeeQ Tip – Loan restructuring should be a last resort, as it may impact your credit score. Look for lenders offering flexible repayment options without additional charges.
Be Aware of Hidden Costs in Personal Loans
When taking a personal loan, it’s essential to look beyond interest rates and evaluate all associated fees. Some lenders offer low-interest rates but charge high processing fees, making the loan expensive. By understanding these charges, you can choose the most cost-effective option and avoid unnecessary expenses.
Key Takeaways
- Processing fees and prepayment penalties can increase total loan costs.
- Late payment fees impact your finances and credit score.
- Loan protection insurance may not always be necessary—verify before opting in.
- Stamp duty and legal fees vary by state but are usually unavoidable.
- Loan restructuring fees apply if you modify the repayment terms.
By being informed, you can save money, avoid extra costs, and choose a personal loan that best suits your financial situation.
Looking for a personal loan with minimal hidden costs? Compare the best offers on RupeeQ today!
