Do personal loan processing fees really matter? Here’s the truth

If you are planning to raise a personal loan, it is vital to weigh several 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 the processing fee is in the 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 the 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 for the 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 the 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 up to 2 percent of the loan amount as processing charges.
• Kotak Mahindra Bank charges 5 percent of the loan amount plus taxes as a processing fee.
• Punjab National Bank charges 1 percent of the loan amount in the 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 is ₹15,000 (plus GST).

Note: The processing fees discussed above are illustrative. For the updated fees, loan terms, tenures, and conditions, refer to the official website of the respective lender.

Do you have to pay a processing fee on every EMI?

It is important to clearly understand that, as a borrower that the processing fee on a personal loan is a one-time charge levied by the bank at the time of loan disbursement.

It is simply deducted upfront from the loan amount and does not apply to every EMI. Borrowers only repay the principal and interest through their monthly instalments.

Still, before applying for any particular loan product, you should go through its brochure and understand the facts properly. In case doubts persist, you should speak to the designated customer service executive before applying for the loan.

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