Types of Charges for Personal Loans You Must Know About
5 min read | 5 months ago
Types Of Charges for Personal Loans That You Should Be Aware Of
Are you looking to apply for funds to meet sudden requirements? Have you finalized a personal loan bank already? You should know more about the types of charges linked to these loans. It matters because such costs add up to your overall expenditure on the loan. Hence, watch out for them to plan smartly in advance. Here is a guide that may help.
Types Of Charges to Be Aware Of
There are various types of charges that personal loan banks impose on their offerings. These may include the following:
- Interest rate on personal loans
- Processing fees
- Verification charges
- GST
- Duplicate statement charges
- EMI Default penalty/Bounce charges
- Loan cancellation penalty
- Prepayment/foreclosure charges
- Others
Let us now look at the meaning of these charges below.
Explanation Of Each Charge and Its Impact on the Overall Cost of The Loan
Here is a detailed look at the personal loan bank charges and how they affect you.
1. Interest rate- It is the most crucial charge of all. Interest rates directly influence the total loan cost and your monthly EMI. They usually range between 12-38% and depend on factors like tenure, amount, credit score, income, etc.
2. Processing fees- Lenders usually charge processing fees of around 3% of the total loan amount. These cover the administrative costs incurred by the bank.
3. Verification costs- Banks often get borrower details verified by third-party organizations. They examine credit scores, credit history, repayment and loan management history, job profiles, and other aspects. This cost has to be covered by the borrower.
4. EMI Default/Bounce Charges- Defaulting on even a single EMI leads to penalties/charges that vary across banks. There is also a charge applicable if your EMI cheque/payment bounces.
5. Duplicate statement charges- Suppose you require a duplicate loan statement or want to re-confirm the outstanding amount. You can pay a nominal fee to get these details through duplicate statements.
6. GST- Goods and services tax (GST) of 18% applies on all loan-related services. These include processing and cancellation charges, prepayment and part-payment fees, duplicate statement issuing charges, and more. GST does not apply to interest costs.
7. Prepayment/Foreclosure Penalties- If you prepay your loan before the completion of the tenure, then the bank may impose a charge to cover its loss. Many banks have 2-4% prepayment or foreclosure fees. Personal loans often have a lock-in term of 6-12 months. Hence, you cannot clear them before this period ends.
8. Loan cancellation penalties- Suppose you want to cancel your loan after approval. In this case, the bank may charge a cancellation fee/penalty. It may be a fixed fee + 18% GST or the interest payment from the time of issuing the loan to its completion.
9. (We don’t allow the customer to change the mode of repayment)
10. Please add other costs and some of generic costs which bank can incur (Collection Cost, EMI Bounce Cost, etc.)
There are some other fees applicable on personal loans at times. These may include stamp duty and legal costs. They differ across lenders.
Tips For Understanding And Managing These Charges Effectively
Understanding the different kinds of charges levied by banks on personal loans is crucial for every borrower. You should know how to manage these costs effectively. Here are some tips that may help.
- Always check the interest rate before applying for your loan. Calculate your monthly EMI and select an optimal tenure where you do not have to pay excessive interest.
- Start part-prepayments after the lock-in period is over. Look for banks offering prepayment options for free or at nominal charges once this lock-in period is over.
- Account for the processing, verification, and other legal costs while applying for your loan. Keep this money in hand to meet the same.
- Try choosing online statements to avoid duplicate statements and other paperwork costs.
- Avoid loan defaults or missed payments by all means. It will not just lead to penalties but also hurt your credit score.
Conclusion
As you can see, there are various charges on personal loans. Your job is to understand them from the beginning and manage them smartly. It will help you cut unnecessary costs in the long run.
FAQs
1. What documents do I need for a personal loan?
Banks and financial institutions have varying documentation requirements. However, in most cases, you will need KYC documents (identity, age, and address proof) and income proof documents like salary slips or Form 16.
2. Are personal loans available for self-employed borrowers?
Personal loans are available for both salaried and self-employed borrowers. However, eligibility and documentation requirements for self-employed applicants may differ from their salaried counterparts.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
