After the covid-19 crisis, many lenders have tightened their lending norms to prevent delinquencies, which may occur as the budgets of people are stretched due to job losses and pay cuts. Many people who applied for loans during this period and faced rejection are complaining on social media about lenders charging them a processing fee despite their application getting rejected. Let’s understand what is a processing fee and why banks charge it.
WHAT IS A PROCESSING FEE?
It is a one-time fee charged by the lender for the cost incurred by it for processing the loan. It typically includes document handling charges, lawyer fee (if any), technical fee for the property valuation done in case of home loan or loan against property, and other such charges.
There are no regulations on how much processing fee a lender can charge. Different lenders charge different processing fees depending on the cost they incur. It may also vary from customer to customer and on the basis of a variety of other factors.
The processing fee may vary depending on the type of loan, loan amount and the creditworthiness of the borrower.
For example, the processing fee for a home loan may vary from ₹5,000 to 1% of the loan amount. While in case of an unsecured loan it can vary from ₹1,000 to 4% of the loan amount.
“Generally, banks charge a higher percentage of processing fee for a smaller loan amount while tend to give a discount in case the loan amount is higher," said Gaurav Gupta, CEO, Myloancare.
What other lenders are charging also has a bearing as every lender wants to stay competitive. Generally, banks charge lower processing fees compared with NBFCs.
The way banks charge fees also differs. “In most cases, processing fees once paid are non-refundable. Some lenders follow a policy of encashing processing fee cheque only on sanction. In many cases, lenders split the total processing fees into two parts—a login fee that is payable upfront and a balance processing fee payable at the time of sanction or disbursement," said Gupta.
“Typically, public sector banks charge processing fee after the loan is sanctioned while private sector banks charge upfront," said Aditya Mishra, CEO, Switchme.in, a platform that helps borrowers shift their home loans to other financial institutions.
WHAT SHOULD YOU DO?
When applying for a loan, you should discuss the processing fee upfront with the lender. Be careful about processing fees charged under any other name. “There is no specific regulation governing the quantum of processing fees, but the regulation requires all fees and charges to be transparent and non-discriminatory in nature. Any hidden charges are prohibited," said Gupta.
You should be careful if the lender is trying to cross-sell you anything such as insurance, credit fitness report as a mandatory charge for availing the loan. Check for a lender charging lower processing fee and interest on the same loan amount.
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