Personal loans have recently gained prominence among individuals looking to finance large expenditures, whether planned or emergency. Clear evidence of this is the 12.1% growth in personal loan credit outstanding compared to a 6.7% rise in overall bank credit in just one financial year, according to the RBI report.
While availing a personal loan has become simpler, it is vital to know about the personal loan processing fees and other associated charges before applying for one. Let’s talk in detail about the processing fees and other charges associated with personal loans.
Personal Loan Processing Fees
Financial institutions levy a processing fee to offset their administrative expenses when borrowers apply for a personal loan. The charge is a small percentage of the loan amount and varies among various lenders. Borrowers have the option of paying the processing fees outright or having them deducted from the loan amount during disbursal.
Processing fees usually include charges for applicants’ background verification to determine their loan repayment capacities.
Apart from the processing fees, financial institutions levy several other charges with loans. These include:
- Penal interest: Penal interest refers to the additional interest that lenders charge on delayed EMI instalments.
- Bounce charges: In case an EMI amount bounces due to insufficient funds in the account, financers levy an additional bounce charge on each missed EMI payment.
- Loan cancellation charges: If borrowers want to cancel their loans after the lender disburses the amount, an additional loan cancellation charge is applied.
- Loan foreclosure charges: Financers can charge an additional amount if the borrower wishes to foreclose his/her loan before the expiry of loan tenor.
- Swap charges: Some financial institutions allow borrowers to shift their personal loan liability or cash flow to a different financial instrument. They charge an additional amount for this service.
These charges are in addition to the interest that borrowers have to pay on a personal loan. You can check the lender’s loan statement to understand them. For example, the Bajaj Finserv loan statement reflects all the personal loan charges applicable for borrowers along with the EMIs paid. Therefore, availing this statement stands important for borrowers to help make an informed decision.
Personal loan interest rates
Borrowers have to pay interest to the financial institution to avail a loan. The total amount they have to pay back includes the principal amount and interest. Personal loan interest rates vary among different financial institutions and are usually slightly higher than secured loans like gold loans, loans against property, etc.
Factors affecting personal loan interest rates
Several factors affect the interest rate for a personal loan, including:
- Credit score: A credit score or CIBIL score is a measure of an individual’s creditworthiness. A credit score of 750 and above is usually desirable for loan applicants. Higher credit scores usually attract lower interest rates.
- Financial history: Lenders check the financial background of applicants to determine their loan repayment capacity. Financial institutions generally charge lower interest rates for borrowers with a clean background and good repayment history.
- Nature of employment: The interest rate on a personal loan depends significantly on the applicant’s nature of employment, whether they are salaried employees or self-employed individuals.
- Income: Since borrowers will repay a loan based on their income, this is a factor that directly affects the interest rates on a loan Lenders perceive individuals in a high-income group as reliable borrowers and less likely to default on loans, thus allowing them lower interest rates.
- Debt-to-income ratio: Having multiple outstanding loans or credit cards consume significant portions of an individual’s income, making them more liable to default. As a result, financers usually charge higher interest rates on personal loans taken by such borrowers.
Tips to get the lowest interest rates
Potential borrowers can keep a few pointers in mind to get the lowest interest rates on their personal loans. These include:
- Comparing personal loan offers from various financial institutions
- Maintaining a good credit score
- Checking for seasonal offers
- Enquiring with lenders operating a pre-existing loan account
- Checking for pre-approved personal loan offers
Different financial institutions extend pre-approved offers on financial products like personal loans, credit cards, business loans, etc., for existing customers. These offers expedite the loan approval process to make it simple and hassle-free. Borrowers can check their pre-approved offers by submitting their names and a few basic details.Since personal loans have no end-use restrictions, borrowers can use them to fund any expenditure necessary. This makes personal loans viable credit instruments for individuals to plan a wedding, go on vacations, or meet emergency expenditures. However, borrowers need to know the personal loan processing fees and other additional charges before applying for a personal loan. This will help them plan their finances and repayment schedule well in advance.
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