The Impact of GST on Personal Loans

Posted on Thursday, June 27th, 2024 | By IndusInd Bank

Since its introduction in July 2017, the Goods and Services Tax (GST) has revolutionized India’s taxation system by replacing a slew of indirect taxes with a unified structure. GST simplifies the tax landscape by eliminating the cascading effect of multiple taxes and aiming for a seamless tax collection process. However, its reach extends to various financial products, including personal loans. This blog delves into the impact of GST on personal loans, detailing how it affects processing fees, prepayment charges, and the overall cost of borrowing.

Understanding GST and Personal Loans

GST, at a standard rate of 18%, applies to most goods and services in India. While personal loans themselves are not directly subjected to GST, several related services and fees are. This indirect application of GST can significantly influence the cost structure of personal loans. Let’s break down how GST impacts the different aspects of personal loans.

1. Processing Fees

One of the initial costs you encounter when applying for a personal loan is the processing fee. This fee, charged by lenders for processing your loan application, is subject to GST.

Impact on Borrowers:

– Higher Upfront Cost: Before GST, if a bank charged a processing fee of ₹10,000, that was the total cost. Post-GST, an 18% tax is added to this fee, raising the amount to ₹11,800. This increment makes the upfront cost of obtaining a loan more significant.

– Budget Considerations: Borrowers must account for the increased cost due to GST when budgeting for a loan. This is crucial for planning and ensuring the affordability of the loan from the outset.

2. Prepayment and Foreclosure Charges

Personal loans offer flexibility in repayment, allowing borrowers to prepay or foreclose their loans to save on interest costs. However, lenders often impose prepayment or foreclosure charges, which are also subject to GST.

Impact on Borrowers:

– Increased Penalty Costs: For example, if the foreclosure charge is 2% on a ₹5 lakh loan, this equates to ₹10,000. Adding GST at 18% results in an additional ₹1,800, making the total penalty ₹11,800. This added cost can impact the decision to prepay or foreclose a loan.

– Strategic Planning: Borrowers need to carefully evaluate the total cost, including GST, when considering early repayment to ensure it aligns with their financial goals.

3. Other Service Fees

Several ancillary services related to personal loans, such as legal fees, valuation fees, and administrative charges, attract GST.

Impact on Borrowers:

– Increased Service Costs: Services integral to loan processing and management, when subjected to GST, raise the overall cost of obtaining a loan. For instance, any consultancy or processing service that incurs a fee will have GST added, making these services more expensive.

– Transparent Costing: The clarity in cost structure, brought by the GST inclusion, helps borrowers understand the comprehensive expense involved in managing a loan, facilitating better financial planning.

4. Interest Rates

Interestingly, GST does not apply to the interest component of personal loans, as interest is considered a financial service and is exempt from GST.

Impact on Borrowers:

– Unchanged Interest Costs: Since interest payments are exempt from GST, the periodic interest payments you make on a personal loan remain unaffected, keeping the core borrowing cost stable.

– Focus on Total Cost: Borrowers should focus on the all-inclusive cost of the loan, including all fees and GST, rather than just the interest rate, to get a complete picture of the borrowing expense.

5. Overall Cost of Borrowing

The cumulative effect of GST on the various charges associated with personal loans influences the overall cost of borrowing.

Impact on Borrowers:

– Higher Total Costs: With GST applied to processing fees, service charges, and prepayment penalties, the total cost of borrowing increases. Borrowers need to factor in these additional costs when calculating the affordability of a loan.

– Informed Decision-Making: Understanding the impact of GST helps borrowers make informed decisions by comparing the total cost, inclusive of GST, across different lenders and loan products.

Managing GST-Related Costs on Personal Loans

Given the added costs due to GST, here are some strategies to manage the financial impact effectively:

1. Compare Loan Offers Thoroughly: Assess the total cost of borrowing from different lenders, including all fees and GST, to choose the most cost-effective option.

2. Negotiate Fees: While the GST component is fixed, negotiating with lenders on processing fees or other charges can help reduce the overall cost.

3. Plan for Upfront Costs: Include the GST on processing fees and other initial charges in your budget to avoid surprises.

4. Evaluate Early Repayment Terms: Consider the total cost, including GST on prepayment charges, before deciding to pay off your loan early.

5. Consult Financial Advisors: If unsure about GST implications or loan terms, consulting with financial advisors can provide clarity and help you make better borrowing decisions.

Conclusion

The introduction of GST has brought about significant changes in the cost structure of personal loans. While the core interest component remains unaffected, the GST levied on associated fees and charges can increase the overall cost of borrowing. By understanding these implications and incorporating GST-related costs into their financial planning, borrowers can navigate the loan landscape more effectively and make informed decisions.

IndusInd Bank and other financial institutions provide clear details on how GST impacts their personal loan products. Staying informed about these factors ensures you can achieve your financial goals while managing borrowing costs efficiently.

If you’re looking for an instant personal loan at best-in-class rates, then do check out IndusInd Bank Personal Loan that is mindfully designed to fit into the varied needs of individuals as per their lifestyles. With IndusInd Bank Personal loan, you get to enjoy instant approval, quick disbursal, and flexible repayment tenure options. That’s not all, its application process is 100% paperless with minimal or low processing fee.

Apply Now

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.