Often when taking a Personal Loan an applicant may consider & bargain for the primary costs for the loan, such as the Rate of interest which will be charged on the funds taken, the Rate of interest is an important component, but there are other costs which are equally essential. What is the Personal loan going to cost, will be determined by a total sum of all the charges involved.

Taking a comprehensive view of all the costs is important: bargaining on one component while overpaying on another relevant one may actually land up increasing the overall cost of the Personal Loan.

Here is an attempt to explain the working of Personal loan costs for the benefit of Loan takers.

The Rate of Interest charged for a Personal loan

Is the major cost pertaining to a Personal Loan, the rate levied varies with the profile of the borrower & from Bank to Bank as per the policy of the particular Lender. The rate of Interest for a Personal Loan ranges from 10.99% to 22% per annum. Major points to be noted are:

  • It is applied @ monthly reducing balance, so with every EMI the principal amount reduces as per the repayment schedule.
  • It charged @ fixed rate per year on the total loan amount appended.
  • The rate of interest offered to a customer varies from Bank to Bank as per the individual policy of the institution.
  • Discounts are offered to account holders, applicants needing higher loan amounts & with a good CIBIL score.

Example depicting of the calculation of the Rate of interest levied on Personal Loan

Details of Personal Loan disbursed
Loan Amount ₹ 1 Lakhs.
Rate of Interest 15% @ reducing Balance
Tenure for Loan 12 Months
EMI 9,025.83
Actual cost of the Personal Loan
Interest amount charged for 12 months 8,309.96
Processing fees charged @ 1% 1,000.00 (GST applicable on processing fees @ 18%)
Total Cost of the Personal Loan 109,309.96

*As per the calculations above, a borrower taking a Loan amount of ₹ 1 Lakhs for tenure of 12 months will pay to the Lender ₹ 9309.96 as the cost of the loan.

The Tenure applied for the Personal Loan

The tenure is the time period within which the loan amount is granted is to be repaid to the Bank.

The standard tenure for a personal loan is for a minimum period of 12 months to a maximum of 60 months. An applicant can request for the required tenure to pay back the loan: the final decision remains with the Bank. The importance of Personal loan tenure is not usually recognised, it plays a major role in the final cost of the Personal loan.

  • A shorter tenure will impose a higher EMI while a longer tenure will give a relief to the amount to be paid back.
  • If the loan amount required is more, a maximum tenure will invite greater eligibility.
  • As the rate of interest for a Personal loan is applied on a yearly basis, therefore the shorter the tenure the lesser the cost of the loan.

Given below is an example of variations in the cost of a Personal Loan with a change in the Tenure.

Tenure 12 months 24 months
Loan Amount ₹ 1,00,000 ₹ 1,00,000
Rate of interest 15% 15%
EMI 9025.83 4848.66
Amount paid as interest 8309.96 16367.84
Total cost of loan 18309.96 116367.84

*As per the calculations above, we can note the variation in EMI being paid for the similar loan amount for 12 months as compared to 24 months. If an applicant can afford a costlier EMI & return the loan amount within 12 months there will be a marked saving in the interest amount paid as compared to a 24 months tenure.

The Processing fees for a Personal Loan

The processing fee is the charge the Personal Loan applicant has to pay for the dispensation of the loan. An application goes through various stages including verification of the documents & the residence premises of the customer, before finally as per the decision of the underwriter the file is approved/ declined. The processing fee charged is as per the regulations of the Bank. From a complete waiver of the fee the charges can be up to 2.5% of the loan amount.

The processing fee is, deducted from the loan amount at the time of disbursal.

  • A processing fee is an upfront charge which should be taken into account when accepting the terms & conditions of the Personal Loan.
  • It is better to ask for a discount in the processing fees rather than bargain for a 0.5% in the rate of interest.
  • An applicant may pay back the loan before expiry of the tenure or opt for a balance transfer; the processing fee once deducted will not be refunded.
  • Discounts in the processing fee are offered for increased loan amounts, to premier account holders of a Bank & applicants working with preferred companies.
Example of the how Processing fee impacts the cost of a Personal Loan.
Processing fee 1% 2.50%
Loan Amount ₹ 1,00,000 ₹ 1,00,000
Rate of interest 15% 14%
EMI 9025.83 8978.81
Amount paid as interest 8309.96 7744.54
Total cost of loan 18309.96 17744.54
1000 2500
19309.96 20244.54

*As per the example above it may be noted that an applicant willing to pay a higher rate of interest & take a discount on the processing fee may be well ahead in costs as compared to an applicant willing a reduced rate of interest.

Pre closure/Part payment charges for a Personal Loan.

The fore closure/ part payment facility refers to the option to pay back the loan or a part of principal, before the tenure. The applicant is not at freedom to do so at will but is governed by the clause of the agreement. Charges will also be applies as per the policy of the Bank.

The lock in period for a personal can be from 6 months to 12 months & a charge of 3% to 5% on the repayment of the principal amount.

If the Personal Loan has been taken as a bridging loan, or in an emergency with an intention to return funds as soon as possible, then choosing a Lender which allows a part payment or the fore closure of the Personal loan without a penalty will work best.

Other charges for a Personal may cease to be important if the applicant can close or pay a part of the loan at will.

Being able to pay back the principal of the in parts, whenever there are surplus funds will override the interest factor: as if a penalty is to be paid the cost of the personal loan will be much costlier.

Given below a comparison depicting Personal Loan costs with & without Fore closure charges.

Personal Loan Details
Personal Loan A Personal Loan B
Loan Amount ₹ 1,00,000 ₹ 1,00,000
Rate of interest 15% 14%
EMI 9025.83 8978.81
Tenure 12 months 12 months
For closure charges Nil 3%
Total cost of loan 18309.96 17744.54
Difference of costs post fore closure
Personal Loan A Personal Loan B
Principal amount balance after 6 months 51862.52 51739.17
interest paid in 6 months 6017.5 5611.44
charges for fore closure nil 1552.17
Total Cost of Personal Loan 57880.02 58902.78

*As per the example above the customer is ahead by paying an extra interest amount & being able to the close the personal loan account before the expiry of the tenure.

The need for the Personal Loan is an individual requirement & varies as per the customer, for one it may be an emergency where as another applicant may apply for a Personal Loan to renovate a home. The bottom line is that the terms should suitable to the customer & all the details regarding the repayment should be clear.

With the many options available it could get a little confusing to the applicant: Allying with You Loan Advisors will help to get the best terms available to fulfil your need, we give priority to understanding the customer’s profile, advice & enable them to procure a personal loan with the best financial terms.