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Is personal loan expensive? Here’s what you must know about personal loan cost
27 January, 2025 | 11:44 IST

Personal loans have become a go-to financial solution for many people in India. Whether it’s managing unforeseen emergencies, funding significant life events or covering big expenses, personal loans offer quick access to cash without the hassle of providing collateral. Their growing popularity stems from their versatility and the ease of obtaining them, making such borrowings an attractive option for various needs.

However, the cost of a personal loan in India is influenced by more than just the interest rate. While the interest rate is a critical factor, additional fees and charges can significantly impact the overall cost of borrowing. Before applying for a personal loan, it’s essential to understand these costs in detail to make an informed decision.

A personal loan is an unsecured loan, meaning you don’t need to provide collateral or security to access funds. Banks and financial institutions typically offer these loans with minimal documentation, making them a convenient choice for urgent financial needs. Repayment terms are flexible, often involving equated monthly installments (EMIs) spread over at least six months to five years, based on the terms and conditions laid down by the lender.

Let’s dive deeper into the costs associated with personal loans — beyond the interest rate — and find out whether they are as expensive as they’re sometimes perceived to be.

Table of Contents

Understanding the cost of a personal loan
Personal loan in India: Interest rates and additional charges
Conclusion
Summary

Understanding the cost of a personal loan

The cost of a personal loan goes beyond just the interest rate. While the interest rate is a key factor, banks and NBFCs often impose additional fees and charges that can significantly influence the overall expense of borrowing.

The total cost of a personal loan can vary based on several factors:

Lender policies: Different banks and financial institutions have varying fee structures, making it essential to compare lenders before deciding.
Loan amount and tenure: Borrowing a larger amount often results in higher costs due to increased interest payments over time. Opting for a longer tenure may lower your monthly EMIs, but it can significantly increase the total interest you’ll pay over the loan’s duration.

Let’s say you take a personal loan for Rs 5 lakhs at an interest rate of 12% per annum. If you opt for 2-year tenure, your total cost will be much lower than if you choose 5-year tenure, even though the monthly EMI for the longer tenure appears more affordable.

ALSO READ: What is the maximum and minimum tenure for personal loans?

To make personal loans more accessible, Moneycontrol has partnered with seven leading lenders to offer 100% digital loans of up to Rs 15 lakhs. The process is streamlined into just three steps: enter your details, complete the KYC process and set up your EMI repayment tenure.

With interest rates starting as low as 12% per annum (depending on your employment status), Moneycontrol simplifies borrowing, making it faster and more convenient than ever.

Personal loan in India: Interest rates and additional charges

When calculating the total cost of a personal loan in India, it's essential to consider both the interest rate and a range of other charges imposed by lenders.

Let’s take a look at the key components that affect personal loan costs:

Interest rates: Interest rates are the most significant factor in determining your personal loan cost. This rate, typically ranging between 10% and 15% in India, represents the percentage charged on the borrowed amount. Higher interest rates translate to higher overall costs.
Processing fees: Lenders charge a processing fee to cover administrative costs involved in approving your loan. This fee generally varies from 0.5% to 2.5% of the loan amount and differs across banks and NBFCs.
Goods and Services Tax: GST is applicable to various services provided during the loan application process, such as documentation and verification. This tax adds an extra layer of cost to your loan.
Verification charges: Before approving your loan, banks conduct background checks to assess your creditworthiness. These checks are performed by third-party agencies, and their charges are passed on to you as part of the loan costs.
Penalty for late payments: Missing or delaying an EMI payment incurs a penalty, increasing the overall cost of your loan. It’s crucial to manage your payments on time to avoid unnecessary penalties.
Foreclosure penalty: If you choose to prepay the entire loan amount before the tenure ends, some banks impose a foreclosure penalty. While this option may save on interest costs, the penalty needs to be factored in which can be 2% to 4% of the outstanding principal.
Charges for duplicate documents: If you require duplicate copies of documents such as payment schedules or outstanding loan statements, banks may charge a fee for issuing these.

Moneycontrol provides access to loans of up to Rs 15 lakhs, with interest rates starting at 12% per annum. The process is completely paperless, allowing you to get an instant online loan with ease.

ALSO READ: Things to do after closing a personal loan to protect your financial health

Conclusion

You need to understand that the cost of a personal loan is calculated based on the approved loan amount, not the disbursed amount. For instance, if you are approved for a loan of Rs 5 lakhs but receive Rs 4.5 lakhs after deducting taxes and fees, your EMI payments will still be calculated on the entire Rs 5 lakhs. This means you are responsible for repaying the entire loan amount, even though some portion of it is deducted upfront for charges.

To avoid surprises, you should account for these deductions and include all associated costs — interest rates, processing fees, GST and other charges — when determining the total cost of a personal loan. Being aware of these factors can help you make a more informed decision before applying.

Summary

Personal loans offer quick financial solutions, but their true cost goes beyond interest rates. Discover the hidden charges and factors that impact your borrowing experience to make informed decisions.

Disclaimer

This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.

About the Author

Fintech

Stay updated on the latest personal finance trends, with a focus on products like credit cards, credit score, personal loans, fixed deposits, and more

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