Processing fee, GST, insurance: 7 charges loan apps bury

Mohan, 41, is an auto-rickshaw driver in Hyderabad. He applied for a ₹25,000 personal loan to repair his vehicle. The app approved ₹25,000. But when the money arrived in his account, he saw ₹21,340.

₹3,660 had vanished before he spent a single rupee.

When he called customer care, they pointed him to the terms and conditions — five pages of dense text he had agreed to by clicking "I Accept." The charges were all there. He had just not seen them clearly.

Mohan's experience is not unusual. It is the norm. Here are the 7 charges that loan apps bury — and how to calculate their total impact before you sign.

Charge 1: Processing Fee

What it is: A one-time administrative fee charged for processing your loan application.

Typical range: 1% to 5% of the loan amount

How it works: Usually deducted from your disbursement. If your loan is ₹25,000 and the processing fee is 3%, you receive ₹24,250. But your EMI is calculated on ₹25,000.

The hidden impact: Because you received less but owe more, the processing fee effectively raises your interest rate. On a 12-month loan, a 3% processing fee adds approximately 5–7 percentage points to your true APR.

What RBI says: The processing fee must be disclosed in the Key Facts Statement (KFS) before disbursement. It cannot be changed after the KFS is issued. If it was not in your KFS, you can demand a refund.

Red flag: Some apps charge "processing fees" after you have already received the money — this is not permitted.

Charge 2: GST on Processing Fee

What it is: Goods and Services Tax at 18% applied to the processing fee

Typical range: 18% of the processing fee (fixed by law)

How it works: If your processing fee is ₹750, GST adds ₹135. This is legal — GST on financial services is mandated by the government.

The hidden impact: Many apps advertise the processing fee without mentioning GST separately, creating the impression of a lower charge.

What to do: Always calculate processing fee + 18% GST together as the full upfront cost of the loan.

Charge 3: Loan Insurance Premium

What it is: An insurance policy — typically personal accident, life, or credit insurance — bundled with your loan

Typical range: 0.5% to 3% of loan amount (sometimes higher for short-tenure loans)

How it works: Either deducted upfront from disbursement or added to your total loan principal (meaning you pay interest on the insurance premium throughout the loan tenure)

The hidden impact: This is the most insidious charge because: It is often framed as mandatory when it is not The premium is frequently added to the loan principal, meaning you pay interest on the insurance cost for the entire tenure Claims processes are opaque — many borrowers never successfully claim

What RBI and IRDAI say: Under the IRDAI-RBI joint circular (2023), lenders cannot mandate a specific insurance product. You can refuse insurance or buy it from an insurer of your choice. If the app tells you insurance is compulsory, ask them to show the RBI circular that mandates it. They cannot.

What to do: Always ask explicitly: "Is this insurance mandatory? What is the RBI circular that requires it?" Most app representatives will back down. Get the opt-out confirmation in writing.

Charge 4: Late Payment Fee

What it is: A penalty for missing an EMI payment, even by one day

Typical range: ₹200 to ₹1,500 per missed payment, sometimes expressed as a percentage (2–5% of overdue amount)

How it works: Applied automatically when an EMI is not collected on the due date

The hidden impact: Some apps have very aggressive late fee structures. A ₹5,000 EMI missed can trigger a ₹500 fee — which, if not paid, can itself be treated as a new default on some platforms.

What RBI says: Late fees must be disclosed in the KFS. They cannot exceed what was disclosed. There is ongoing regulatory pressure to cap late fees, but no hard national limit exists yet.

What to do: Always set up auto-debit from a bank account you know will have the required balance. Do not rely on remembering to pay manually.

Charge 5: Bounce Fee / EMI Return Charge

What it is: A fee charged every time an EMI auto-debit instruction fails because of insufficient funds

Typical range: ₹350 to ₹750 per bounce (plus your bank will also charge ₹250–₹500 for the failed NACH)

How it works: Your bank charges you for the failed NACH transaction. The lender also charges you for their failed collection attempt. One missed EMI can therefore trigger two separate fees.

The hidden impact: One bounce event can cost ₹700–₹1,500 in combined bank + lender fees. For borrowers already struggling, this compounds the crisis rapidly.

What to do: If you anticipate difficulty paying an EMI, contact the lender before the due date. Many apps will reschedule if approached proactively — they cannot if the account has already bounced.

Charge 6: Foreclosure / Prepayment Penalty

What it is: A fee charged if you want to close your loan before the end of the tenure

Typical range: 2% to 5% of the outstanding principal

How it works: If you come into money and want to clear your loan early, some lenders charge a penalty for the privilege

What RBI says: For floating rate loans, RBI prohibits prepayment penalties for individual borrowers. For fixed-rate personal loans (most instant loans), penalties are still permitted but must be disclosed in the KFS.

What to do: Before signing, ask: "What is the foreclosure penalty?" If the answer is "none," get it in writing. If there is a penalty, factor it into your decision about using this lender vs. one that allows free prepayment.

Charge 7: Annual Maintenance Fee / Platform Fee

What it is: An ongoing annual or monthly fee for maintaining your loan account or access to the lending platform

Typical range: ₹300 to ₹2,000 per year (varies widely)

How it works: Some apps charge this as a recurring fee throughout the loan tenure. Others charge it upfront. Some bury it as "platform fee" in the fine print.

What RBI says: Any recurring fee must be in the KFS. If it was not disclosed, you do not owe it.

The hidden impact: A ₹1,000 annual fee on a 3-year loan of ₹1 lakh adds 3,000 to your total cost — and raises effective APR by 2–3 percentage points.

The Mohan Calculation: What His Loan Actually Cost

Let's reconstruct Mohan's ₹25,000 loan:

Mohan repays ₹25,000 (the full sanctioned amount) plus interest. His effective APR — calculated on the ₹23,240 he received — is approximately 46% on a 12-month tenure, not the 24% the app advertised.

Your Protection: The Pre-Signing Checklist

Before clicking "Accept" on any loan:

[ ] Did I receive a KFS document listing all these charges? [ ] Does the KFS show the APR (not just monthly rate or daily rate)? [ ] Is insurance listed as mandatory? (If yes, ask them to cite the RBI circular — they cannot) [ ] What is the late fee and bounce fee? [ ] Is there a foreclosure penalty? [ ] Is the disbursed amount less than the sanctioned amount? (If yes, understand exactly why)

If you cannot get a clear "yes" to the first two questions, do not proceed with this lender. Use SahiSujhav's Loan App Reviews to find one that is transparent.

SahiSujhav's EMI Truth Calculator exposes all hidden charges and shows your true APR — free, no login, no PAN.

HeyZ AI can review your specific loan offer and tell you if any charges violate RBI guidelines.

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• Your rights under DPDP Act 2023
• Cancel a loan inside the 3-day cooling-off
• RBI Ombudsman vs internal complaint