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Beyond interest rates: The hidden costs of personal loans revealed

Don’t let the hidden charges on your personal loan catch you off guard. Find out about these charges here!

The hidden costs of personal loans revealed

Nowadays, personal loans are a common way for people to get the money they need for various reasons, from paying for a dream vacation to dealing with unforeseen costs. However, while quick cash and flexible repayment options are appealing, you must dig deeper.

A personal loan’s overall cost includes more than just the interest rate. The hidden charges in a personal loan are a factor that is crucial but often ignored. The hidden fees can significantly increase the overall cost of borrowing. 

This article aims to shed light on these personal loan hidden charges, helping you make an informed decision when considering a personal loan. So, let’s dive in and unmask these charges that could turn your affordable loan into an expensive affair.

Understanding personal loans

Financial institutions often extend credit to individuals in the form of unsecured personal loans. A personal loan permits the borrower more freedom of choice in how and what they spend the money on, as opposed to secured loans like a mortgage or vehicle loan. This might include anything from arranging for a wedding to paying for a vacation or even handling unforeseen medical bills.

The two primary costs associated with personal loans are interest rates and origination fees. An annual percentage rate (APR) is a common way to indicate the cost of borrowing a certain amount. 

An origination fee refers to a single-time expense that your lender deducts from the principal loan amount to cover administrative and processing charges. Typically, these fees fluctuate between 1% and 5%, but there are instances where you might be levied up to 10%, or even a fixed sum.

However, the actual cost of a personal loan goes beyond the interest rate and origination fee. Before you apply for a personal loan, make sure you understand any hidden fees. Awareness of these hidden charges can help you choose a loan that truly meets your financial needs, as they can significantly increase the cost.

Also read: Unlocking prosperity: The transformative power of financial literacy 

Hidden charges on personal loans

One of the most prominent aspects of personal loans is the interest rate. However, what are the hidden charges in personal loans, is a question that every borrower should ask. Let’s delve into these charges:

Processing fees & GST

This fee is the lender’s way of covering the expenses associated with processing your loan application. Lenders have different methods of calculating it, but it’s usually a percentage of the loan amount. The processing fee can be paid in advance or subtracted from the loan amount before disbursal. 

Also read: IGST explained: Simplifying inter-state taxation in India 

Prepayment penalties

If you have extra money, you can save on interest by paying off your loan early. However, there may be a penalty for paying off the loan early. It is because the lender would have made more money if the loan had been extended according to its original terms. A prepayment penalty of 2% to 3% of the total loan balance is possible.

Cancellation/foreclosure charges

If you choose to terminate your loan after it has been disbursed, you may be charged a cancellation fee. Lenders do this to compensate for the interest they had anticipated receiving. It is important for borrowers to be informed about these charges and think about how they could impact their financial situation.

The key distinction is that prepayment reduces the total interest burden and shortens the loan tenure by paying off a portion or a large portion of the loan before the end of the term. In contrast, cancellation or foreclosure settles the full principal amount before the conclusion of the initial loan term.

Late payment charges

Paying your EMIs on time is crucial. Many financial institutions impose late payment fees for EMIs that are late.

Verification fees

When a lender checks your credit and identity, they may charge you a fee. All administrative expenses, including background checks and credit report checks, are covered by this fee.

Goods and Service Tax (GST)

GST is charged on various services during loan processing at 18%. It includes processing fees, prepayment penalties, and other charges.

Fees for extra statements

Lenders may charge fees for supplementary statements or copies of loan paperwork. Processing and transmitting these documents incur administrative expenses, which this fee covers.

How to avoid hidden charges?

Being aware of hidden charges in personal loans can ease the financial burden of navigating the personal loan landscape. Some ways to sidestep these fees are as follows:

Read the fine print: The official loan agreement details any hidden fees or other terms associated with the loan. Be sure you’ve read and comprehend this document completely before signing it.

Ask questions: Feel free to ask questions or seek clarification regarding any part of the loan agreement that is unclear to you. Instead of being caught off guard by unexpected charges later, it’s better to clear up any confusion up front.

Compare lenders: The fee structures of various lenders might vary. Find the personal loan with the lowest APR by browsing around and comparing offers from different lenders.

Timely payments: Avoid incurring late fees by making your EMI payments punctually. It can be helped by setting up automatic payments.

Further reading: How can financial literacy month help you achieve your money goals?


Navigating the world of personal loans doesn’t have to feel like walking through a minefield of hidden charges. Armed with the correct information and careful observation, you can sidestep these potential obstacles. Remember, the key to a smooth loan journey lies not just in finding the best interest rates, but in uncovering the hidden charges in personal loans.

So, the next time you consider a personal loan, don’t just scratch the surface. Dive deeper, ask questions, and ensure you’re not just signing up for a loan but for one that truly works for you.  

After all, being financially savvy isn’t just about making money, it is also about knowing how to keep it!

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StockGro Team

StockGro is India’s first and largest ‘Social Investment’ platform aimed at helping you master the art of “Trading & Investment”. Trade, Invest and get rewarded to Learn everything about ‘Investments’ the fun-filled way.

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