When we look for a personal loan, we consider interest rates, repayment tenures, eligibility, and income while calculating the total cost of borrowing; but what many people forget to consider is processing fees. Many people don't realise that the money they borrow comes with additional costs, like personal loan processing fees, that can increase the amount they have to repay.
If you are someone or know somebody who is applying for a loan, this blog is going to give you the information you need. Make sure to read it till the very end and also share it with your loved ones to learn everything about personal loan processing fees.
What are personal loan processing fees?
Once you apply for an online personal loan, there is a small fee that is always taken out before the rest of the cash goes into your bank account. This particular fee is referred to as a personal loan processing fee. It is a one-time charge that is charged by the lender to review your paperwork. You can view it as an initial entry charge to qualify for the loan.
Processing fees differ depending on the lender; hence, it is important to check when comparing different lenders.
Let’s understand this better with the help of an example:
Suppose you borrow ₹1 lakh and the lender charges a processing fee of 3%. Now, this is how the calculation will look:
| Particulars | Amount |
|---|---|
| Approved loan amount | ₹1,00,000 |
| Processing fee at 3% | ₹3,000 |
| GST at 18% on the fee | ₹540 |
| Amount credited to your account | ₹96,460 |
Why do lenders charge processing fees?
If you are curious about why lenders actually charge personal loan processing fees, then you must know that managing a loan requires time, technology, and human effort. When you submit your personal loan documents, a lot happens behind the scenes, and these fees are charged for that. Let’s delve into this.
To examine your application: Your income, job information, credit history, and financial obligations are reviewed by the lenders before giving you a loan. This is why it's said that your financial history plays a crucial role in getting you a good offer.- To verify your information: After that, there is a personal loan verification process that helps lenders check the information provided in your online loan application. It includes identity checks, address verification, and income verification, depending on the lender's requirements.
- To cover administrative costs: There are various administrative tasks performed during the processing of loan applications. The processing fee is used to cover the costs of these activities.
What distinguishes a personal loan interest rate from its processing fee?
Some people usually get confused between what an interest rate is and what personal loan processing fees are, and that’s okay. If you are somebody who is confused and wants clarity, here’s a simple explanation table for you:
| Factor | Interest rate | Processing fee |
|---|---|---|
| Meaning | Cost of borrowing | The fee to process the application |
| Frequency | Calculated over the repayment period | Charged once |
| Calculation | Computed based on loan balance or the formula agreed upon | Computation as a percentage of the loan or fixed fee |
| Effect | Part of total payment expenses | Can decrease the loan amount you receive |
Should you compare loan processing fees before applying?
Yes, absolutely. Budgeting a loan means taking into consideration each and every rupee that comes out of your pocket. Although the processing charges may be small from the paperwork viewpoint, they affect the money you receive. This is why, to get a full and clear picture of how much money you will get, you must deduct the personal loan processing fees. This will help you budget your finances better.
What other factors should you consider besides processing fees when applying for a loan?
To get a total cost of borrowing, make sure that you consider the factors mentioned below along with the personal loan processing fees:
- Interest rate: Determine what the interest rate is and whether it is fixed or variable. Even a slight variation in the interest rate could make a huge difference in the total interest charged. We at Prefr offer interest rates ranging from 18% to 30% per annum.
- Loan tenure: A long tenure may lower your monthly EMI but increase the total interest paid. This is why you must choose a tenure that suits your monthly budget and does not put a strain on your finances. We offer repayment tenures from 6 to 60 months.
- EMI affordability: Find out your monthly EMI using an EMI calculator and add up the rent, household expenses, other EMIs and savings. This way, the repayment amount will leave you a buffer for any unforeseen expenses.
- Other charges: Check for any foreclosure charges or prepayment charges. Not every lender applies a charge for prepaying the loan, as they have different personal loan requirements, but to be on the safe side, do check this with your lender.
- GST and other taxes: Look into the taxes levied on processing fees and other services.
Summing up
When it comes to personal loans, it becomes very important to consider each and every charge applied by the lender to get a full understanding of how much exactly you are going to repay. This can be as small as a processing fee. In addition to that, make sure that you always compare different loan providers and select one that provides transparent terms and conditions to avoid making the wrong choice.
At Prefr instant cash loan provider, we understand that every financial need comes with its own set of hopes and worries. Through our digital platform, we provide personal loans up to ₹5,00,000 with clear terms, transparent disclosures, and simple steps so you always know what to expect.
Frequently Asked Questions
Is a processing fee compulsory?
Is GST applicable to processing fees?
How can I avoid processing fees?
Can processing fees be refunded?
Are processing fees legal?
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