Taking a personal loan is a significant move, often tied to dreams of a better home, career or handling unforeseen needs with ease. While loan amounts and interest rates often catch our attention first, there’s more to the story, like fees and charges. They offer transparency, helping you understand exactly what goes into securing the funds you need.
Knowing about these charges allows you to approach the loan with full confidence, understanding each part of the process and how it supports your overall experience. Let’s walk through the common fees and charges associated with personal loans to see how they bring clarity and structure to the borrowing process.
1. Processing fees
The processing fee is a one-time cost that covers the administrative expenses involved in reviewing and approving your loan application. Lenders use this fee to cover a range of operational costs, from verifying documentation to underwriting and approving the loan. Typically, this fee ranges from 0.5% to 2.50% of the loan amount. Some lenders allow this fee to be deducted from the loan amount, while others may request it upfront, depending on their policies.
2. Verification charges
Verification charges are a component of the fee that specifically relates to verifying the borrower’s credentials, such as credit history, income sources and identification documents. Lenders often engage third-party agencies to perform these checks, which involve reviewing the borrower’s credit score, repayment history and financial stability. It supports the banking and non-banking financial institutions in accurately assessing creditworthiness, minimising risk and ensuring responsible lending practices.
3. Late payment fees
A late payment fee is imposed if you miss or delay an instalment. This charge serves as both a deterrent to missed payments and a way to compensate lenders for potential administrative and financial inconvenience caused by delays. Consistent on-time payments maintain a steady cash flow for lenders, while late payments disrupt this cycle and may require additional collection efforts. The late fee also helps in motivating timely repayments, which is essential for the overall health of the loan repayment structure.
4. GST
The Goods and Services Tax (GST) applies to nearly all fees associated with personal loans, including processing fees, prepayment charges and late payment fees, at an 18% rate. This tax is set by the Indian government to standardise costs across various financial transactions and make them predictable for both lenders and borrowers. For instance, if the processing fee is ₹5,000, an additional ₹900 (18% GST) is added, ensuring that all parties contribute to a common tax structure that funds public services. While it increases the overall fee slightly, GST simplifies the tax structure, making it more transparent.
5. Prepayment or foreclosure charges
Prepayment or foreclosure charges are applied when a borrower chooses to repay their loan early, either in part or in full. These fees, often ranging from 2% to 4% of the remaining principal, compensate the lender for the interest income they would otherwise have earned over the full loan term. By charging this fee, lenders can offset their lost revenue and maintain financial stability. Some lenders allow partial prepayments or have a cooling-off period after which foreclosure charges may be waived, giving borrowers flexibility without disrupting the lender’s financial model.
Conclusion
Rates, fees and policies can vary widely and even a small difference in rates or terms can impact your repayment experience significantly. Additionally, prioritise choosing a loan term and EMI that align with your income flow, helping you maintain consistent repayments and a healthy credit score.
At Unity Small Finance Bank, we prioritise flexibility and transparency in our repayment options and policies, so borrowers have clear terms that support sound financial decisions. Our goal is to help you manage loans effortlessly, fitting your lifestyle and financial goals. So, apply today and take the next step with confidence, knowing you have a partner dedicated to making your financial journey smoother and more rewarding.
