Personal loan fees and GST: the true APR on ₹5 lakh

The money you get is not the money you owe

A personal loan offer says ₹5 lakh at 13% for three years. The EMI on the personal loan EMI calculator is ₹16,847. What the offer does not say in large type is that the lender will keep a processing fee, plus 18% GST on that fee, out of the disbursal. Interest is still charged on the full ₹5 lakh. So you pay for ₹5 lakh and receive less.

The cleanest way to see the cost is the annual percentage rate (APR): the rate that, applied to the money that actually reached your account, produces the same EMI. For loans sanctioned from 1 October 2024, RBI's Key Facts Statement rules require lenders to show an APR to retail borrowers before they sign. Here is how to check it yourself. The rates and fees below are illustrative, not current offers.

A worked example: 13% with a 2% fee

The ₹11,800 deducted up front is a cost you pay on day one for a loan that runs three years, so it adds 1.68 points a year to the headline 13%. The GST alone is ₹1,800; the GST calculator does that piece for any fee.

To check an APR yourself, list the cash flows: ₹4,88,200 received, then ₹16,847 paid each month for 36 months. The monthly rate that balances them, times 12, is 14.68%. Put the same cash flows into the XIRR calculator and it reports about 15.7%, because XIRR compounds the monthly rate into an annual one. Same cost, two conventions; compare like with like.

How the fee moves the APR

Same ₹5 lakh, 13%, three years:

On a three-year loan, each 1% of fee adds about 0.85 point to the APR. A bundled credit-protection policy whose premium is deducted from the loan does the same thing. The KFS rules count charges the lender collects for third parties, such as insurance, in the APR, so the figure there should include it. If the premium is not in the KFS, ask why.

Shorter loans feel the fee more

Same 13% and 2% fee, different tenures:

A one-year loan spreads the same ₹11,800 over 12 months instead of 60, so its APR is highest, even though it costs the fewest rupees. The APR compares lenders; the cost-of-credit column tells you what a tenure costs. Use both.

Comparing offers

Three-year loans of ₹5 lakh:

The offer with the lowest headline rate is the most expensive, and the one with the highest rate is the cheapest. That reversal is why the APR exists. Which of these offers you are shown at all depends largely on your credit record; how your CIBIL score is calculated explains what lenders read.

The rule of thumb

Compare personal loans on the APR in the Key Facts Statement, and sanity-check it: headline rate plus roughly 0.85 point for each 1% of fee on a three-year loan, more on a shorter one. A rate quoted "flat" needs converting before any of this; our post on what a flat 7% loan really costs and the flat vs reducing calculator do that.

The pitfalls

Needing the full amount in hand. If you need ₹5 lakh credited, you have to borrow ₹5,12,085 with a 2% fee, which lifts the EMI to ₹17,254, ₹407 a month more.

Closing early. Repaying in month 12 leaves ₹3,54,361 owed. With no foreclosure charge, the fee spread over one year lifts the APR to 15.94%. Many personal loans are fixed-rate, and for a personal loan RBI's 2025 prepayment directions remove the charge only if it is floating-rate and was sanctioned or renewed from 1 January 2026. With an assumed 4% foreclosure charge plus GST, ₹16,726, the APR on that one-year loan becomes 19.49%. Check the charge before you take the loan, then use the loan prepayment calculator.

Charges outside the KFS. Under the KFS rules, a fee not listed there cannot be charged later without your explicit consent. Keep a copy.

No tax offset. Personal loan interest is deductible only when the money demonstrably funds something with its own relief, such as a house or a business. For a wedding, a holiday or other debts, the full cost is yours.

A personal loan is often the cheapest unsecured option, but not always the cheapest option. Gold loan vs personal loan vs credit card compares the routes, an emergency fund in a liquid fund avoids the fee entirely (where to keep one covers the options), and if you are clearing several debts, snowball vs avalanche sets the order. How an EMI actually works covers the schedule behind every number here, and prepay, refinance or invest covers what to do with spare cash once the loan is running.

For education only, not financial advice. Rates, fees and charges are assumed for illustration; your lender's Key Facts Statement is the document that counts.