Loan application rejected, but you may still have to pay a processing fee. Know why

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After the covid-19 crisis, many lenders tightened their lending standards to avoid defaults, which can occur when people’s budgets are stretched due to job losses and pay cuts. Many people who applied for loans during this period and were rejected are complaining on social media that lenders charge them processing fees despite their application being rejected. Let’s understand what a processing fee is and why banks charge it.

WHAT IS A PROCESSING FEE?

These are one-time fees charged by the lender for the costs incurred by him in processing the loan. It usually includes document processing fees, attorney’s fees (if applicable), technical fees for the property appraisal performed in the event of a home loan or loan against property, and other such fees. kind.

There are no regulations on the amount of processing fees a lender can charge. Different lenders charge different processing fees depending on the cost they incur. It may also vary from customer to customer and depending on various other factors.

Processing fees may vary depending on loan type, loan amount and borrower creditworthiness.

For example, the processing fees for a home loan can vary from 5,000 at 1% of loan amount. While in the case of an unsecured loan, it can vary from 1,000 at 4% of loan amount.

“Generally, banks charge a higher percentage of processing fees for a lower loan amount, while they tend to give a discount if the loan amount is higher,” said Gaurav Gupta, CEO of Myloancare.

What other lenders charge also has an impact, as every lender wants to stay competitive. Typically, banks charge lower processing fees than NBFCs.

The way banks charge fees also differs. “In most cases, the processing fee once paid is non-refundable. Some lenders follow a policy of not cashing processing fee checks unless there is a sanction. In many cases, lenders divide the total processing fee into two parts: a connection fee payable upfront and a balance processing fee payable at the time of sanction or disbursement,” Gupta said.

“Generally, public sector banks charge processing fees after loan approval, while private sector banks charge up front,” said Aditya Mishra, CEO of Switchme.in, a platform that helps borrowers transfer their home loans to other financial institutions.

WHAT SHOULD YOU DO?

When applying for the loan, you should discuss the processing fee in advance with the lender. Pay attention to processing fees charged under another name. “There are no specific regulations governing the amount of processing fees, but the regulations require that all fees and charges be transparent and non-discriminatory in nature. All hidden fees are prohibited,” Gupta said.

You need to be careful if the lender tries to sell you anything like insurance, credit report, as a mandatory fee to qualify for the loan. Look for a lender that charges lower processing fees and interest on the same loan amount.

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