Personal loan: advertised 10.5%, actual 13.1%
Banks and NBFCs advertise personal loan rates "starting from 10.5%." But the actual cost — after origination fees, late charges, and foreclosure penalties — is significantly higher. Here's the breakdown.
The honest number: ₹5L personal loan, 3 years
Origination fee: the hidden 2–3%
Almost every personal loan charges 1–3% upfront as "processing" or "origination" fee. On a ₹5L loan, that's ₹5,000–₹15,000 deducted before disbursement. You borrow ₹5L but receive ₹4.85L — yet pay interest on the full ₹5L. This alone adds 0.8–1.5% to your effective rate.
Foreclosure penalty: paying to leave early
Want to close your loan early? Most lenders charge 2–5% of outstanding principal as foreclosure penalty. On a ₹3L balance, that's ₹6,000–₹15,000 just for the privilege of repaying. Some NBFCs don't allow foreclosure at all in the first 6–12 months. RBI has removed prepayment penalties on floating-rate loans but most personal loans are fixed-rate, so the penalty applies.
What to do about it
1. Compare the total cost, not just the rate. Ask for the total repayment amount including all fees before signing.
2. Negotiate the processing fee. Many lenders will reduce it for existing customers or strong CIBIL scores (750+).
3. Avoid NBFCs with high foreclosure penalties. If you might prepay, choose a lender with 0–2% penalty or none after 12 months.
4. Check the APR disclosure. RBI mandates lenders show the Annual Percentage Rate — look for it in the Key Facts Statement.