Home Loan - Processing Fees vs Interest Rate

Home Loan – Processing Fee vs Interest Rate

During this festival season, many of the banks are coming up with lucrative home loan offers to attract home loan borrowers. Offerings include options like a lower interest rate, processing fee waiver, cash back or EMI waiver options. Remember that a home loan is a long term commitment. So before finalizing any home loan scheme, pay attentions to some basic facts. In this article we will take a look at the use case to help you choose between zero processing fees and lower interest rate. In the next article we will take a look at other options like cash back and EMI waiver.

The processing fee is a one time expenditure. It is used by bank to complete loan processing formalities and it is non refundable. Generally it is in the range of 0.25% to 0.50% of the loan amount. Few banks are even offering zero processing fee to lure customers. Given the option between lower interest rate and zero processing fee, it is advisable to go for lower interest rate in most cases. Let’s take a look at following illustration.

Bank A offering a 10.5% interest rate with 0% processing fee and Bank B is offering a 10.4% interest rate with 0.5% processing fee.

 

Home Loan – Processing Fee vs Interest Rate
Bank A Bank B
Loan Amount
40,00,000 40,00,000
Interest Rate (%)
10.5
10.4
Processing Fees (%)
0
0.5
Tenure (months)
240 240
EMI
39,935
39,667
Interest Payment
55,84,446
55,20,047
Total Payment
95,84,446
95,40,047
Saving in total Payment
44,399

 

Even though Bank A is offering 0% processing fee, in long term taking a loan from Bank B is beneficial due to slightly lower interest rate.

So if you are in a dilemma about choosing between lower processing fee and lower interest rate, reuse our Loan Transfer Calculator as shown below. The illustration below shows how to get the savings amount for the values shown in the above table. Know your savings by entering values on the same lines.

Loan Transfer Calculator
Loan Transfer Calculator

Published by

Prashant Bendale

Prashant Bendale is an author at I & Finance and an avid investor. He is a mechanical engineer from a reputed institute, an experienced IT professional and loves to author articles for I & Finance to share his knowledge with everyone who needs help with Finance.

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