Cost Associated in Raising a Business Loan:

In the previous blog we had seen the different types of business loan facilities available in India. In this blog, we shall see the various cost associated with raising a loan.

1) Interest Cost:

  • Interest cost is the cumulative amount of interest a borrower pays on a debt obligation over the life of the borrowing. Interest is paid on the debt in addition to repayment of principal.
  • Interest rates can be fixed, where the rate remains constant throughout the term of the loan, or floating, where the rate is variable and can fluctuate based on a reference rate.

2) Application Fee:

  • A loan application fee is what lenders charge when a borrower applies for a loan.
  • This fee is usually nonrefundable and many lenders do not charge application fees at all.

3) Processing Fee:

  • Processing fee is one time charge which the banker collects from you.
  • It is charged by the bank as it has to bear some administrative costs while processing and sanctioning your loan.
  • This is usually a small amount, which varies from bank to bank and typically costs about 0.5% to 2.50% of the total amount of the loan. 

4) Guarantee Fee:

  • A guarantee fee is a sum paid to the issuer of a mortgage-backed security.
  • These fees help the issuer pay for administrative costs and other expenses and also reduce the risk and potential for loss in the event of default of the underlying mortgages.
  • Fees may be a percentage of the asset value or a fixed amount.

5) Late Fee:

  • A late fee is penalty or additional amount charged by bank from the borrower who fails to make the payment on a debt (EMI) by the due date.

6) Prepayment Fee:

  • Banks recover their money from the interest you pay on the Loan. If you pay off your debt before the stipulated tenure bank may incur a loss, with you discontinuing your loan before the set tenure.
  • To make up for this loss, your bank may charge you a prepayment penalty.
  • Typically, a bank will charge a small prepayment/foreclosure fee of 2-4%.

7) Documentation Fee:

A documentation fee is a sum charged to process the paper work.

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