All About Processing Fee


What is known as a processing fee?

A processing fee is a one-time fee charged by lenders to cover the cost incurred to process the requested loan amount. It is also called an administrative fee, as it is paid only when the applied loan amount is approved by the lender. This fee comprises technical fee, lawyer fee (if any), handling charges, and other charges. It is a small percentage of the borrowed amount, typically around 0.5% of the loan plus GST, and usually varies across all the lenders.

The processing fee is generally paid upfront, i.e. you are supposed to pay it straight out of your pocket rather than let it be deducted from the loan amount later. Though most banks charge it on their loan schemes, some choose to waive it off as an introductory offer.

KEY TAKEAWAYS

  • A processing fee is a one-time fee levied by the bank or a financial institution when you apply for a loan.
  • It is mainly charged by the lender to cover the costs incurred during the loan process.
  • It may vary across banks and with respect to each borrower.
  • It is not supposed to be deducted from the borrowed amount. Instead, you have to pay it out of your pocket, and it is non-refundable.
  • Apart from the processing fee, lenders may also charge you a technical fee, document handling charges, loan conversion charges, etc.

Why do lenders charge a processing fee?

Processing fees are mainly the cost incurred by the lender while processing the requested loan amount. The range of fees is determined based on some factors, such as the level of risk involved, the loan amount, and your credit score. So, if you miss or forget to repay the loan EMIs, it might prompt the lender to levy a higher rate of processing fee on your loan amount.

Type of processing fee

Flat fees: Flat fees are the payments that a processor levies on all transactions irrespective of the brand, type of card, and whether the purchase you made is a physical purchase or an in-store purchase. These charges are a small percentage of the transaction amount or the purchase made plus a fixed fee. These are best for new businesses that handle a small volume of transactions that let them make some fee negotiations with the payment processor. Additionally, the business is aware of the fees associated with processing payments.

Interchange plus pricing: These plans are complex to comprehend compared to the flat-rate plans, which makes the bank statement even tougher to comprehend. As per an interchange plus pricing strategy, the processor levies an interchange fee plus a percentage per transaction or a fixed fee.

Tiered fees: According to a tiered pricing strategy, the loan processor assembles all the different interchange fees into three basic categories based on the risk associated with the transaction. The different tiers are categorized as:

  • Qualified rate: Before any transaction is categorized under the qualified rate tier, the processor must ensure that it meets all the requirements for processing. For instance, it includes transactions that are swiped with a standard credit card at a physical terminal, which carries the lowest rates and the lowest risk.
  • Mid-qualified rate: If a transaction does not meet all the essential requirements designed by the processor, then it is downgraded to either non-qualified or mid-qualified tiers. For instance, transactions made via phone or any direct mail orders that do not require the availability of a credit card involve a higher risk of fraud. Thus, it requires businesses to pay a higher rate to cover the increased risk.
  • Non-qualified rate: The rest of the transactions that do not qualify for the above tiers fall into this category. For instance, signature card transactions, reward card transactions, and e-commerce transactions. Because of the huge involvement of risk, this tier levies the highest fees.

The shortcoming of these tiered plans is that the processor is the only one who decides which transaction falls into which tier. Thus, in this scenario, businesses cannot be sure that the next customer transaction falls into which specific tier.

How is the processing fee calculated?

The one-time processing fee is applied to the processing and administration of the loan amount. It is determined based on the lender’s credit policy and the loan amount. And, it may differ basis your employment type.

The processing fee formula is = (order amount X percentage fee) + (transaction fee X number of transactions).

This fee generally ranges between 0.50% and 2.00% of the approved loan amount. Apart from that, 18% GST is also applied to it.

When do lenders waive off the processing fee?

Your processing fee depends on numerous factors, such as the amount of loan, type of loan, your past repayment behaviour, and your creditworthiness. Suppose you never delayed or missed your EMI repayments, and you possess a good CIBIL score. In that case, chances are that your lender waives off the processing fee as a special offer, as they believe you would not be negligent towards the EMI repayments. A lender always prefers lending money to someone who has been consistent towards making their repayments than someone who has been a defaulter.

Final words

Once your loan application is approved, you are charged a one-time processing fee by the lender. As these charges occur only once, people often forget to consider them while calculating their loan EMIs. Hence, it is recommended that before you apply for a loan, do consider the processing fee charged by each lender while comparing their different loan options. However, remember that you have to pay this amount out of your pocket, and it will not be deducted from your loan amount. It may also consist of other charges that a lender incurred during the loan processing period.

Other Words

  • Prepayment
  • Proprietorship
  • Pre-clousre
  • Partial Disbursement

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