How do fees and hidden charges impact the total loan cost?

The overall cost of a personal loan can be highly impacted by fees and hidden charges, which frequently result in the loan being more costly than the advertised interest rate indicates. Although interest rates are the main determinant of your borrowing costs, other fees levied by lenders can quickly mount up as well as have an impact on the total amount of your repayment.

The processing fee which is usually taken out up front and typically varies between 1% and 3% of the loan amount, is the most prevalent fee. This implies that the amount credited to your account might be less than what you requested. Documentation fees can range from a few hundred to a few thousand rupees. 

Hidden charges can include penalties for late EMI payments, which are often calculated as a percentage of the overdue amount and can significantly increase your outgo if payments are missed. If an EMI bounces cause of insufficient funds then lenders may impose a bounce charge, which is an additional fixed fee per incident. Prepayment or foreclosure charges are also important to note as these are levied if you choose to repay your loan before the full tenure, potentially offsetting any interest savings you might expect from early repayment.

Costs such as Goods and Services Tax (GST) are applicable on most fees, further increasing the total cost. Some lenders may also levy charges for loan cancellation, statement requests, or loan account maintenance.

To avoid any surprise always review the loan agreement in detail, ask the lender to clarify all applicable charges, and consider the Annual Percentage Rate (APR), which reflects the true yearly cost including all mandatory fees. This approach ensures you have a clear understanding of your total borrowing cost before committing to a personal loan.