Personal Loan Hidden Charges: Processing Fee, Prepayment Penalty, and Other Costs You Must Know Before Borrowing

Personal loans have become one of the most popular borrowing options in India today. Whether it’s for a medical emergency, home expenses, or unexpected needs, people often turn to personal loans because they are quick, hassle-free, and do not require collateral. The approval process is simple, and many banks and NBFCs (Non-Banking Financial Companies) even provide instant personal loans online.

However, what many borrowers overlook are the hidden charges attached to these loans. These charges, if ignored at the time of borrowing, can later feel like a financial burden and cause regret. To help you make an informed decision, here’s a detailed look at the common charges associated with personal loans.

1. Processing Fees

Almost every bank or financial institution charges a processing fee for approving and disbursing a personal loan. This fee is non-refundable and is either deducted upfront from the loan amount or collected at the time of sanction.

• Typically, the processing fee ranges between 1% to 3% of the total loan amount.

• Some banks may also have a minimum fixed amount irrespective of the loan size.

Example: If you take a loan of ₹2 lakh and the processing fee is 2%, you will have to pay ₹4,000 as a processing charge.

2. Prepayment or Foreclosure Charges

If you decide to repay your loan before the end of its tenure, lenders usually levy a prepayment or foreclosure charge.

• This charge is applied on the outstanding principal amount.

• It may range between 2% to 5% of the pending loan balance.

• Some banks waive off prepayment charges if a certain number of EMIs (usually 12 months or more) have already been paid.

While prepaying helps reduce interest burden, you should always calculate whether the penalty outweighs the benefit of early repayment.

3. Late Payment Penalty

If you miss an EMI or delay repayment, banks impose a late payment penalty. This can be charged as a fixed amount or as an additional interest rate (often 2–3% per month on the overdue EMI).

Delays not only increase costs but also impact your credit score, making it difficult to get loans in the future.

4. Other Hidden Charges

Besides the major fees, borrowers should also be aware of smaller but significant charges that banks may impose:

• Duplicate Statement Charges: Requesting a duplicate loan statement may cost anywhere between ₹100 and ₹500.

• Loan Cancellation Charges: If you cancel your loan after approval and disbursement, cancellation charges may apply. Usually, banks allow a “free-look” or “cooling-off” period (about 15 days), but after that, fees up to ₹2,500 may be charged. Note that the processing fee is never refunded.

• Part Payment Charges: If you repay only a portion of your loan, some banks levy 3% + GST on the part-paid amount (within the first 24 months of loan tenure). After that period, part-payment may be free.

• Repayment Mode Swap Fee: Changing your repayment method (like ECS to NACH or cheque to auto-debit) may cost around ₹500.

• Overdraft-Related Fees: Salary overdrafts come with separate processing fees (0.99% of the limit, with a minimum and maximum cap), annual renewal fees, and even cash transaction charges at branches.

• Duplicate NOC/NDC Charges: If you request a duplicate “No Dues Certificate” or “No Objection Certificate,” banks may charge around ₹250.

• Amortization Schedule Fees: Requesting a physical amortization schedule print may cost around ₹200.

• Recovery Charges: If your loan account is handed over to recovery agencies, actual recovery costs are billed to you.

5. Why You Must Check the Fine Print

While personal loans are marketed as instant and convenient, the hidden costs can make borrowing expensive. A loan advertised at an interest rate of 11% may effectively cost much more once processing fees, foreclosure charges, and penalties are factored in.

Borrowers should always:

• Read the loan agreement carefully before signing.

• Ask the bank or NBFC to disclose all charges in writing.

• Compare offers from multiple lenders to find the lowest overall cost, not just the lowest interest rate.

Final Word

A personal loan can be a lifesaver in emergencies, but ignorance of hidden charges can turn it into a financial burden. By understanding fees like processing charges, prepayment penalties, late payment fines, and other service-related costs, you can make a smarter borrowing decision and avoid unpleasant surprises later.

Remember, the cheapest loan is not always the one with the lowest interest rate—it’s the one with the lowest total cost, including hidden charges.