Personal loans: Does the processing fee matter at all? All you need to know

If you are planning to raise a personal loan, it is vital to weigh a number of factors before you choose the one that suits you the most. Among several factors, it is vital to consider the processing fee which could be as high as 2-3 percent of the total loan amount.

So, let us first understand what exactly is the processing fee in case of a personal loan. It is a one-time fee charged by the bank from the borrower for processing of loan application. It is typically deducted upfront from the loan proceeds and only the remainder of personal loan money is transferred to the borrower. For instance, when someone applies for a ₹10 lakh loan and the processing fee is 2 percent, the bank would transfer ₹9.8 lakh after deducting the processing charges of ₹20,000.

This is important because of following reasons:

I. Sometimes, a lender offers a loan at a slightly lower interest rate but the processing fee is higher, thus negative the impact of lower interest rate.

II. When a bank charges a lower interest rate and the processing fee is also equally less. The overall deal becomes too tempting for the loan applicant.

III. Since the loan proceeds are transferred only after deducting the processing charges – the high charges may prompt the applicant to apply for a slightly higher loan amount.

Processing fee charges by some top banks

HDFC Bank charges up to ₹6,500 plus goods and services tax (GST).

ICICI Bank charges upto 2 percent of the loan amount as processing charges.

Kotak Mahindra Bank charges 5 percent of the loan amount plus taxes as processing fee.

Punjab National Bank charges 1 percent of loan amount in form of processing charges from the general public. For defence personnel, there are no charges.

State Bank of India (SBI) levies 1.50 percent of the loan amount as processing charges while the minimum charges are ₹1,000 (plus GST) and the maximum being ₹15,000 (plus GST).

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