It is also important to understand the Loan APR concept before considering bank offered interest.
Banks charge more than just the interest rate on loans including processing fees, GST and documentation charges etc.
The loan APR factors these one-time costs, represents the true cost of your loan after taking into loan interest, fees & charges that you pay when getting a loan.
It is a more complete measure that reflects the net effective cost of your loan on a yearly basis. And it's a more accurate way to compare loan offers than just looking at interest rates.
Ex:
If you pay ₹6,025/- as processing and document charges for a personal loan of ₹2,50,000/- under 10.99% EMI scheme with a tenure of 1 year, your loan APR is 15.64%. i.e., you are effectively paying 15.64% interest on the loan.
Example:
- EMI: ₹31,819
- Total Paid: ₹763,655
Even though the loan is for ₹700,000, because of the ₹8,712 in upfront costs, the actual amount you received is:
₹700,000 – ₹8,712 = ₹691,288
You effectively received ₹691,288 (after subtracting ₹8,712 in fees), but paid back ₹763,655 in 24 monthly EMIs.
Even though your nominal rate is 8.5%, with the upfront fees included, your true cost of borrowing is about 9.75% APR.
Banks charge more than just the interest rate on loans including processing fees, GST and documentation charges etc.
The loan APR factors these one-time costs, represents the true cost of your loan after taking into loan interest, fees & charges that you pay when getting a loan.
It is a more complete measure that reflects the net effective cost of your loan on a yearly basis. And it's a more accurate way to compare loan offers than just looking at interest rates.
Ex:
If you pay ₹6,025/- as processing and document charges for a personal loan of ₹2,50,000/- under 10.99% EMI scheme with a tenure of 1 year, your loan APR is 15.64%. i.e., you are effectively paying 15.64% interest on the loan.
Example:
- Loan Amount: ₹700,000
- Interest Rate: 8.5% per annum
- Tenure: 2 years
- Fees paid upfront: ₹8,712
- Repayment Type: Monthly EMIs (with interest compounded on a reducing principal basis)
- EMI: ₹31,819
- Total Paid: ₹763,655
Even though the loan is for ₹700,000, because of the ₹8,712 in upfront costs, the actual amount you received is:
₹700,000 – ₹8,712 = ₹691,288
You effectively received ₹691,288 (after subtracting ₹8,712 in fees), but paid back ₹763,655 in 24 monthly EMIs.
Conclusion:
Even though your nominal rate is 8.5%, with the upfront fees included, your true cost of borrowing is about 9.75% APR.
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