Processing fees on personal loans: What’s included and what to watch for

A processing fee is a charge imposed by a bank or financial institution for processing a loan application. It may cover activities such as application assessment, document verification and administrative processing.

The amount can vary between lenders and loan products. It may be a fixed amount, a percentage of the sanctioned loan amount, or subject to a specified minimum or maximum.

Before accepting a personal loan, check whether the processing fee is inclusive of applicable taxes and how it will be collected.

What can be included in the cost?

The overall borrowing cost can include more than the processing fee.

Not every charge applies to every loan. The applicable costs depend on the lender, product and terms of the agreement.

Does the processing fee affect the interest rates?

The processing fee and personal loan interest rate are separate components of borrowing cost. A lower advertised rate does not necessarily mean the loan will have the lowest overall cost if additional fees are significant.

For example, two loans may offer similar interest rates but have different processing fees. Comparing the total cost of borrowing rather than looking at the rate alone provides a clearer picture.

The RBI requires regulated entities to provide borrowers with a key facts statement for applicable retail term loans, containing key information about the loan and its costs.

What should you check before paying?

Before proceeding with an application, review:

• Processing fee amount and calculation
• Applicable taxes
• Whether the fee is refundable if the loan is not sanctioned or disbursed
• Prepayment conditions and charges
• Penal charges
• Other applicable fees
• Annual percentage rate or overall borrowing cost