EMI, fees and APR
Your EMI uses the standard reducing-balance formula. Then we take the processing fee with GST, subtract it from the amount you would receive, and work out the annual rate that makes your EMIs repay that smaller amount. That is the APR: the single number that best compares offers with different fees.
Where to find the inputs: the loan amount, rate, tenure and processing fee are all in the Key Facts Statement (KFS) that RBI requires lenders to give you before you sign. The KFS also states the APR, so you can check our figure against the lender's. If an app shows only a monthly or "per day" rate, ask for the KFS before accepting.
Worked example
₹5 lakh at 11.5% for 4 years with a 2% processing fee:
| EMI | ₹13,045 |
| Total interest | ₹1,26,130 |
| Processing fee + GST | ₹11,800 |
| Amount you receive | ₹4,88,200 |
| APR (true yearly cost) | 12.78% |
Now suppose the lender also deducts a ₹10,000 credit insurance premium at disbursal. You receive ₹4,78,200, the EMI stays the same, and the APR rises to 13.91%. Insurance on a personal loan is generally optional. If you do not want it, say so in writing before the loan is disbursed.
How your credit profile changes the price
A personal loan is unsecured: there is no asset for the lender to fall back on. So the rate depends almost entirely on your credit report, income stability and employer. Two people borrowing the same amount on the same day can be quoted very different rates. Here is ₹5 lakh over 3 years at three illustrative rates:
| Strong profile (11%): EMI | ₹16,369 |
| Strong profile (11%): total interest | ₹89,299 |
| Average profile (14%): EMI | ₹17,089 |
| Average profile (14%): total interest | ₹1,15,196 |
| Weak profile (18%): EMI | ₹18,076 |
| Weak profile (18%): total interest | ₹1,50,745 |
The gap between the strong and weak profile is ₹61,446 of interest on the same loan. If your score is borderline, a few months of on-time card payments and lower card usage can be worth more than any rate negotiation. Our guide to CIBIL score and loan rates explains what lenders look at.
Short tenures and prepayment lock-ins
Personal loans typically run for 1 to 5 years, and a few lenders go up to 6 or 7. Because the tenure is short, the EMI is high relative to the amount, and stretching it is tempting. Pick the shortest tenure whose EMI you can pay even in a bad month, then prepay if you can.
Check the lock-in first. Many lenders do not allow foreclosure for the first 6 to 12 EMIs and charge a percentage of the outstanding amount after that. On the ₹5 lakh, 4-year loan above, closing after 12 EMIs with a 4% charge plus GST looks like this:
| Outstanding after 12 EMIs | ₹3,95,569 |
| Charge + GST | ₹18,671 |
| Interest you avoid | ₹74,021 |
| Net saving | ₹55,350 |
Closing early still pays here, but the later you close, the less interest is left to save and the more the charge matters. Test your own case with the personal loan foreclosure calculator.
Common personal loan mistakes
- Comparing only the rate. A loan at a slightly lower rate with a 3% fee can cost more than one at a higher rate with a 1% fee. Compare the APR on each KFS.
- Accepting the pre-approved amount. Borrow what you need. A bigger loan means a bigger fee too, because the fee is a percentage.
- Applying to many lenders at once. Each application can add a hard enquiry to your credit report. Check offers through soft-check tools first.
- Using a personal loan to fund a down payment. It raises your total EMI and can hurt your home or car loan eligibility.
- Borrowing from unregistered apps. Check that the app names a bank or RBI-registered NBFC as the lender and that the money comes straight into your bank account.
Assumptions
- Fixed reducing-balance rate for the full tenure.
- Processing fee is deducted upfront. Insurance or other add-ons are not included unless you add them in the loan offer comparison tool.
Frequently asked questions
What is the real cost of a personal loan?
Interest plus all fees. The processing fee (often 1% to 3%, plus 18% GST) is usually deducted from the amount you receive, so you pay EMIs on more money than you actually get. The APR shown above includes this. Any insurance premium deducted at disbursal raises the cost further.
Is a flat interest rate the same as a reducing rate?
No. A flat rate charges interest on the original loan amount for the entire tenure, so the effective rate is much higher, roughly 1.8 to 1.9 times the flat rate for typical tenures. Our calculator uses the reducing-balance method. If a lender quotes a flat rate, ask for the reducing-balance rate or the APR in the Key Facts Statement.
Can I prepay a personal loan?
Usually yes, but most personal loans are fixed-rate, so the RBI ban on foreclosure charges for floating-rate loans does not cover them. Many lenders have a lock-in of 6 to 12 EMIs and then charge 2% to 5% of the outstanding amount plus GST. Use the personal loan foreclosure calculator to see if closing early is worth it.
What CIBIL score do I need for a personal loan?
There is no single cut-off, but many banks look for a score of around 750 or more for their better rates. Below that you may still get a loan, often from an NBFC, at a higher rate or a lower amount. Your employer category, salary and existing EMIs matter as much as the score itself.
How much personal loan can I get on my salary?
Lenders look at how much of your take-home pay already goes to EMIs. Many cap all EMIs, including the new one, at roughly 50% to 60% of net monthly income, lower for smaller salaries. Rent you pay, credit card dues and loans you co-signed can all reduce the amount you are offered.
Can I cancel a personal loan after it is disbursed?
For loans taken through digital lending channels, RBI requires a cooling-off period during which you can exit by repaying the principal and the proportionate interest, without a prepayment penalty. The length is set by the lender and stated in the KFS. Outside that window, normal foreclosure terms apply, so read them before you accept.