Are There Hidden Charges of Personal Loans I Should Be Aware Of?

Processing fees

This is usually the first hidden cost you will encounter. Banks charge a processing fee just to evaluate and approve your loan application. This ranges from 1% to 3% of your loan amount, though some lenders charge a flat fee.

For a ₹5 lakh loan with a 2% processing fee, you are immediately paying ₹10,000 before you have even received the money.

And even if your loan gets rejected, some banks don't refund the processing fee. Always check if the fee is refundable in case of rejection.

GST on everything

Whatever charges the bank levies, Goods and Services Tax (GST) of 18% gets added on top. That ₹10,000 processing fee? It actually becomes ₹11,800 after GST. GST applies to almost every fee, like prepayment charges, late payment penalty, documentation charges and more. One may often forget about GST when calculating costs, but it adds up quickly.

Documentation and verification charges

Some lenders charge separately for document verification, legal fees or administrative costs. These can range from ₹500 to ₹2,000.

You might also be charged for physical document collection (if they send someone to pick up your papers), courier charges for sending loan documents or cheques and even charges for issuing your loan account statement.

Prepayment and foreclosure penalties

Want to close your loan early? That will cost you. While RBI regulations (effective from January 2026) prohibit prepayment charges on floating-rate personal loans, many existing loans still have these clauses.

Foreclosure charges range from 2% to 6% of the outstanding principal.

Part-prepayment charges are usually lower, around 1% to 3%, but they still discourage you from paying off debt faster.

Late payment penalties

Miss an equated monthly instalment (EMI) and you will incur two charges,

• A late payment fee (₹500 to ₹1,500) and
• Penal interest (1% to 3% per month on the overdue amount).

Both these charges differ for each lender.

Loan cancellation charges

Sometimes, the borrower can change their mind and may not want to go ahead with it after it has been approved. In this case, some banks charge cancellation fees ranging from ₹1,000 to ₹5,000.

Even after disbursement, if you return the money within a few days, you might face cancellation charges plus interest for the period the money was in your account.

Loan restructuring or rescheduling fees

Banks often charge ₹500 to ₹2,000 restructuring fees to restructure your loan in terms of tenure or EMI date.

Some lenders also charge for converting your loan from one type to another or for changing the repayment tenure.

Insurance charges

Many banks try to sell you loan insurance (often called credit protection cover) that pays off your loan if something happens to you. Though this can be useful, it's rarely mandatory despite how banks present it.

Always ask if the insurance is optional. If you already have adequate life insurance, you probably don't need it.

Statement and certificate charges

Need a loan statement, NOC or closure certificate? Some banks charge ₹100 to ₹500 for each document.

If you need multiple statements over your loan tenure or duplicate copies of any certificates, these small charges add up.