Key takeaways
- Compare offers for the same amount and tenure, or the EMIs will not tell you much.
- The APR in the Key Facts Statement folds interest and the lender’s charges into one yearly figure.
- A lower rate with a higher fee can cost more than a slightly higher rate with a small fee.
- A longer tenure lowers the EMI but raises the total interest you pay.
- Check later costs too: prepayment, late-payment and bounce charges, and how a floating rate can change.
Why the interest rate alone can mislead
Lenders advertise the interest rate because it is easy to compare. What you actually pay depends on four things together: the rate, the tenure, the fees and the charges that apply later. An offer can win on one and lose on the others.
Fees also change what you receive. If a ₹10,000 processing fee is deducted from a ₹5 lakh loan, you get ₹4.9 lakh but pay interest on the full ₹5 lakh. The real cost is higher than the rate suggests, and the APR, explained below, captures this.
Line up offers on equal terms
Ask each lender to quote for the same amount and the same tenure, in writing and ideally as a KFS. Otherwise a lower EMI may simply come from a longer repayment period. Our loan calculators work out the EMI and total interest for each quote. Note these for every offer:
- Interest rate, and whether it is fixed or floating
- EMI and number of instalments
- Processing fee and GST on it
- Insurance or other add-ons, and whether they are optional
- Legal, valuation or documentation charges for a secured loan
- Total interest over the full tenure
Read the APR in the Key Facts Statement
RBI rules require lenders to give you a Key Facts Statement (KFS) for retail and MSME term loans before you sign. It shows the annual percentage rate (APR), which includes the charges the lender levies, so you can compare offers on one figure. It also sets out the repayment schedule for the whole tenure.
For loans of seven days or more, the KFS must stay valid for at least three working days, so you have time to compare without pressure. A lender also cannot charge you a fee that is not in the KFS without your explicit consent. Keep a copy of every KFS you receive.
A worked example: lower rate, higher cost
These figures are illustrative. Two lenders offer ₹5 lakh for 36 months. Offer A charges 11.5% a year with a 2% processing fee, which is ₹10,000. Offer B charges 12% a year with a 0.5% fee, which is ₹2,500.
Offer A has the lower EMI, about ₹16,488 against about ₹16,607, and saves about ₹4,290 in interest over three years. But its fee is ₹7,500 higher. Add interest and fees together and Offer A costs about ₹1,03,568, while Offer B costs about ₹1,00,358.
So Offer B is cheaper by about ₹3,200, and GST on the fees widens the gap. The APR shows this at a glance. Because it folds the fee into the yearly rate, Offer A’s APR comes out higher than Offer B’s. Run the same test on any two offers before you choose.
Tenure: the quiet cost
A longer tenure lowers the EMI, which feels easier. But you pay interest for more months. Take ₹10 lakh at 10.75% a year as an illustration. Over 5 years the total interest is about ₹2.97 lakh. Over 10 years it is about ₹6.36 lakh, more than double.
See the full table on how the tenure changes your EMI, then choose the shortest tenure whose EMI you can pay comfortably every month. Our guide to choosing a personal loan shows how to set that EMI.
There is also a middle path. Pick a tenure that keeps the EMI comfortable, then part-pay whenever you have a surplus, such as a bonus. On a floating-rate loan for personal use this costs nothing extra under RBI rules, and every part-payment cuts the interest that follows.
Costs that show up later
Under RBI rules, lenders cannot levy prepayment charges on floating-rate loans to individuals for non-business purposes. Other loans may carry a charge. Our part-payment calculator shows how much interest an early payment can save.
If you already have a loan, a lower rate elsewhere may help, but only if the saving beats the cost of moving. Check it with the balance transfer calculator. Some charges only appear when plans change, so look for these in the KFS and loan agreement:
- Late-payment and bounce charges for a missed EMI
- Part-payment and foreclosure rules, including any minimum number of EMIs
- How and when a floating rate resets, and whether the lender raises the EMI or extends the tenure
- Fees to switch to a lower rate with the same lender
- Annual or renewal fees on limits and overdrafts
A short checklist before you accept
LoanBazzaar compares offers from all major banks and loan providers and explains the rate, fees and total repayment in plain words. Our answer on charges apart from interest lists the usual ones. The lender decides the final terms.
Before you sign, tick each point:
- The same amount and tenure across all offers
- The APR and total repayment taken from each KFS
- Every fee listed, including GST and add-ons
- Prepayment, late-payment and rate-reset terms read
- An EMI that leaves room for savings and emergencies
Relevant loan assistance
Want to compare your loan offers?
Use our free calculators for EMI, part payment and balance transfer, or ask a LoanBazzaar advisor to line up offers from all major banks and loan providers.
Sources
How we write our guides
The LoanBazzaar editorial team writes these guides around the questions borrowers ask us most, in plain language. We update them when rules or common lender practice change. Spotted an error or something out of date? Tell us.
