Since personal loans can be availed of without submitting any collateral, The banks will impose certain charges. Personal loans are nowadays granted instantly without any tedious paperwork or documentation to be done by the applicant. Personal loans are unsecured loans wherein the applicant does not have to pledge any collateral for availing of the loan.

Let us understand the concept of personal loans and the charges associated with it in detail.

What is a Personal Loan?

A personal loan is a loan that is acquired from a bank. These loans are unsecured and hence no collateral is required for availing of the loan. The use of personal loans can be done as and how the applicant may like. The repayment of this loan is generally in equated monthly instalments that are spread through the tenure of the loan. There is a fixed interest rate that is levied on the amount of the loan.

How Does It Work?

Personal loans are generally unsecured loans as these types of personal loans are the favoured ones in the market. These do not attract any security and hence non payment might not result in losing any possessions but may result in legal charges and also depletion of your credit score. The decrease in the credit score might result in future borrowing from the person.

On the other hand, if the personal loan is a secured loan, the bank is authorised to seize the asset that is pledged by the applicant in case of non-payment of the dues. These include car loans and mortgages.

Charges Associated With Personal Loans

Loan Processing Charge

When your loan is processed by the bank there is a small amount of charge that they levy as an administrative expense. This charge is levied for the administrative and processing of the loan by the bank. Generally, the amount of this charge is very minimal. The charge is somewhere between 0.5% to 2.5% of the total loan amount. Each bank has a separate charge that is levied as a processing charge.

 Verification Charge

When you avail of the loan from a bank, the bank has to be sure about the fact that you will be able to repay the loan timely and as per the conditions of the loan. Due to this process, the bank appoints a third party to verify your credit history and check your repayment history. For this activity, the bank incurs expenses and hence, it appoints a third party. Therefore this charge is levied to the customer by the name of verification expense.

Penalty on Default

The banks let you pay the loan amount equated to monthly instalments. These instalments are decided on the basis of the loan amount, tenure and interest rates. But, more importantly, these are decided on the ability of the individual to repay the loan. Sometimes you may choose to pay off the loan in a shorter period of time. At this stage, if you are unable to pay the EMIs then the banks will levy a penalty on the amount. This is because you have defaulted on the payment of the monthly instalments. Hence, you should always choose EMIs that you can afford.

Pre-payment Penalty

In case you are owning funds that can be used to pay off a certain personal loan that you have taken, you can choose to repay or foreclose your personal loan. This practice is not preferred by the banks as they will lose out on the interest income from your loan amount. Thus, the bank charges a foreclosure fee that ranges from 2%-4% of your loan amount. The foreclosure fee may also depend upon the stage at which you decide to pay off the loan.

Goods and Service Tax 

The banks offer different services to their customers during the loan period and also for the processing of the loan. These services that are availed by the applicant will attract tax. Thus, the bank will be charging goods and service tax to the customer based on the services that are availed by them.

Duplicate Statement Fees

If you need any details of the payment schedule or you lose track of the repayment that is done to date, the bank will provide you assistance for the same. The bank charges a fee for providing you with duplicate statements and other details. This fee is called the duplicate statement fee. You can also check the amount of loan that is outstanding with the help of these statements. The banks offer these statements in addition to the paperwork that is associated with the loan.


Personal loans are given as a lump sum payment and the use of the loan is not defined by the banks and the lending agencies. The applicant may choose to use the loan as and where he/she wishes to. One should always be aware of the charges that are levied and should be questioning the authorities in case of any doubts as the banks and lending agencies may levy any hidden charges on the loan amount. To be aware of such charges, one should closely monitor the loan statement and the detailed paperwork provided by the lending agency.

FAQS of 6 personal loan charges you should know

1:Should you pay an upfront fee for a loan?

Never pay an upfront fee for the loan. A regulated lender will never charge a fee that has to be paid upfront by the applicant.

2:Is partial payment allowed for personal loans?

Yes, partial payment is allowed in the case of certain personal loans. A fee is charged for the same and it is allowed only after certain instalments have been paid by the borrower.

3:Can non-payment of a loan affect your credit score?

Yes, non-payment of a personal loan will affect the credit score and also the ability to borrow credit in the future.