Personal loan: Why does processing fee matter more than you think?

At the time of borrowing a personal loan, the cost that borrowers incur is not the rate of interest alone. There are several associated costs as well, and these include credit assessment, document verification, legal due diligence, technical valuation and administrative costs. 

All these expenses are clubbed together into one and levied as a processing fee.

What is a processing fee?

It is the fee charged by a lender for the processing of a loan. The fee could be anywhere between 1 to 2% of the loan amount. This means if the total loan amount is ₹5 lakh and the fee is 1%, the lender would transfer only ₹5 lakh (-) 1%, i.e., ₹4,95,000 to the borrower as loan proceeds. 

In other words, this fee is not ‘charged’ but ‘deducted’ from the loan amount.

Why does the processing fee matter?  

It matters because it could be very high since it is levied as a percentage of the loan. The higher the loan amount, the higher the processing fee. For instance, 2% of a ₹5 lakh loan would amount to ₹10,000, but the same 2% on a ₹10 lakh loan would mean ₹20,000 as a processing fee. 

Beyond the rate of interest

Being aware of the processing fee is important because the rate of interest is not the only factor that leads to cash outgo. Borrowers also have to bear the cost of processing the loan before they receive the loan money.  It is the effective interest rate which truly reflects the cost borne by the borrower. 

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