When applying for a personal loan, most borrowers focus primarily on the interest rate and loan amount. However, there are several other charges associated with borrowing, and one of the most important among them is the processing fee for personal loans. This fee is a one-time charge levied by lenders to cover administrative costs associated with loan processing.
It is important to understand the personal loan processing fee since it influences the total cost of borrowing. The fee is usually subtracted from the loan amount prior to disbursal, so if you borrow a specific amount, the amount received might be slightly less due to this deduction. Although processing fees are generally between 0.5% and 2.50% of the loan amount, they may differ based on the lender, creditworthiness of the applicant, and loan terms.
Because personal loans are not secured, i.e., no collateral is needed, lenders impose processing fees to offset their risk and pay for operating costs. Although the fee is non-refundable, discounts or waivers are sometimes given to certain customers, e.g., current account holders or high-income professionals.
For the borrowers, it is important to analyze what is the processing fee for personal loan and how it affects the repayment before taking a lending decision. In this blog, let us learn the facts of what is processing fee in personal loan, how it is determined, why the lenders impose it, and whether it can be negotiated.
What Is a Processing Fee for Personal Loan?
A personal loan processing fee is a single payment that lenders charge to pay for administrative expenses incurred in the process of evaluating and approving a loan application. The fee is usually taken from the loan proceeds at disbursement and is not refundable, even if the loan is prepaid.
Lenders charge this fee to pay for several expenses, such as:
- Application evaluation – Evaluating the borrower’s credit report, income, and financial history.
- Verification charges – Hiring third-party agencies to confirm income, employment, and other credentials.
- Operational charges – Processing paperwork, legal formalities, and loan documents.
The processing fee for personal loan differs from lender to lender and depends on the creditworthiness of the borrower, the amount of the loan, and the loan term.
How Is the Processing Fee Calculated?
Personal loan processing fee is usually charged as a percentage of the loan amount. The percentage can range between 0.5% to 2.50%, with a minimum and maximum limit usually set by the banks and other financial institutions.
For instance:
Suppose you apply for a ₹5 lakh loan and the processing charge is 2%, the total cost will be ₹10,000.
If the charge is 1% on a loan of ₹10 lakh, then the overall charge will be ₹10,000.
Some lenders offer a flat processing charge rather than a percentage charge. On top of that, Goods and Services Tax (GST) is charged on processing fees, which adds to the cost of borrowing.
Why Do Lenders Charge a Processing Fee?
Lenders charge a personal loan processing fee for various reasons:
- For covering administration expenses – Loan processing entails several costs, such as documentation, authentication of documents, and verification of backgrounds.
- For offsetting unsecured lending risk – As personal loans involve no collateral, lenders charge fees to compensate for foreseeable risks.
- To ensure operational effectiveness – The fee funds technology, personnel, and infrastructure necessary for smooth loan processing.
- To earn extra income – The processing fee contributes to a lender’s income, making the lender financially stable.
Common Rates for Processing Charges on Personal Loans
Personal loan processing charge is different as it depends upon the lender’s policy and the profile of the borrower. Following are some general rates of finance companies:
- Banks – 1% to 2.50% of the loan.
- NBFCs (Non-Banking Financial Companies) – 0.5% to 2.50% as per the borrower’s credit score and loan.
- Digital lenders and fintech firms – They can charge zero or small processing fees to attract people.
Always check the fee structure of the lender before applying so you know the precise charges and don’t end up with hidden charges.
Can You Negotiate the Processing Fee?
Yes, at times, borrowers can negotiate the personal loan processing fee with the lender. This is how:
- Keep a high credit score – Individuals with a good credit profile (750+ score) stand a better chance at receiving discounts or waivers.
- Go for pre-approved loans – A lot of banks provide zero processing charges for pre-approved personal loans for the same bank’s customers.
- Make the application with a good financial portfolio – In case you possess a stable income source and have a low debt-to-income ratio, lenders will agree to waive off the fee.
- Check seasonal deals – Certain lenders offer reduced processing fees during holiday periods or promotional periods.
What Are the Alternatives to a Processing Fee?
If you would like to steer clear of a processing fee on a personal loan, look at the following alternatives:
- Zero-fee loan deals – Certain online lenders provide personal loans with zero processing fee for a specific set of customers.
- Employer tie-ups – Certain banks offer rebated processing fees for the employees of well-known organizations.
- Membership-based loans – A few credit unions and cooperative banks exempt members from processing fees.
Influence of the Processing Fee on Loan Repayment
Although the personal loan processing fee does not have a direct effect on EMIs, it influences the net disbursal amount of the loan. As the fee is deducted beforehand, borrowers will get an amount lesser than applied.
Illustration:
Loan amount applied: ₹10 lakh
Processing fee (2%): ₹20,000
Amount received: ₹9.80 lakh
Therefore, always take the processing fee of personal loans into account while calculating the net amount of loan one needs.
Conclusion
Knowing what is processing fee for personal loan is important while borrowing. Even though this charge is inevitable, it is always better to be aware of how the charge is computed, for what reason banks charge it, and if the same can be negotiated to make borrowing cheaper.
Before taking a loan, always compare lenders, look for zero-fee options, and read all charges involved. At Stashfin, we provide clear loan processing with low fees, making loan approvals fast and hassle-free.
Frequently Asked Questions
Is the Processing Fee Refundable?
No, the personal loan processing fee is non-refundable even if the loan is paid early or cancelled after disbursal.
How Does the Processing Fee Affect Loan Approval?
The processing charge of personal loans does not affect loan sanction but influences the disbursed amount since it is deducted from the sanctioned amount.
How Can You Avoid High Processing Fees?
To reduce personal loan processing charges, apply during festive seasons, have a high credit score, and look for lender discounts or waivers.
Do Online Loans Have Lower Processing Fees?
Yes, fintech platforms and digital lenders tend to have lower personal loan processing fees compared to conventional banks, so they are an affordable choice.