The gap between the stated rate and the real cost
The one number that distinguishes a personal loan from almost any other is the processing fee. It is charged up front, deducted from the disbursal, and GST of 18 per cent is added on top. A 2 per cent fee on a ₹5,00,000 loan is ₹10,000 plus ₹1,800 of GST: the sanction letter says ₹5,00,000, the bank account sees ₹4,88,200, and the EMI schedule still charges interest on the full ₹5,00,000. That one gap is enough to lift the effective annual cost from the stated 15 per cent to roughly 18.04 per cent. The headline on this page is the EMI; the harder number is the one next to it.
How the effective rate is computed
Think of the loan as a series of cash flows from the borrower's side. On day zero, the lender pays out net disbursal (amount minus fee minus GST on the fee). From month one to month n, the borrower pays an EMI computed on the gross amount. The effective monthly rate is the number that makes the present value of all those flows equal to zero: this is the internal rate of return, or IRR. Multiply by twelve for a nominal annual figure, or compound (take the twelfth power and subtract one) for the effective annual cost, which is what this page prints.
There is no closed form for IRR; the page bisects between minus 99 per cent and 1000 per cent a month and returns the rate where the present value crosses zero. Independent PowerShell arithmetic confirmed the default result to within a tenth of a basis point.
Worked example a reader can check
Take ₹5,00,000 at a stated 15 per cent for 36 months, with a 2 per cent processing fee.
- EMI from the standard formula: ₹17,333 a month.
- Total paid over 36 months: ₹6,23,976 (36 x ₹17,333, rounded).
- Interest in that total: ₹1,23,976.
- Fee: ₹10,000. GST on the fee at 18 per cent: ₹1,800. Fee bill: ₹11,800.
- Net disbursal: ₹5,00,000 minus ₹11,800, so ₹4,88,200.
- Effective monthly rate (IRR): 1.392 per cent.
- Effective annual cost (compounded): 18.04 per cent, against a stated 15 per cent. The gap is roughly 300 basis points.
Foreclosure, and what the 2026 RBI rule does not do
The RBI Pre-payment Charges on Loans Directions, 2025, effective 1 January 2026, bar prepayment fees on floating-rate loans to individual borrowers for a non-business purpose. Almost all retail personal loans in India are fixed-rate, which the rule does not cover. The sanction letter can (and usually does) carry a foreclosure or prepayment charge: a flat percentage of the outstanding at the time of closing, sometimes with a minimum rupee floor.
Toggle the foreclosure scenario on and the page asks for the month you plan to close and the charge from your own sanction letter. It then rolls the schedule forward to that month, computes the outstanding, applies the charge, and recomputes the effective annual cost on the shorter cash-flow stream. On the default run, foreclosing at month 18 against a 4 per cent charge raises the effective cost to about 20.57 per cent, because the fee is the same but the loan runs for half as long.
How each input moves the answer
Four inputs move the numbers you see, and they move them in different directions:
- Loan amount: scales the EMI, the interest and the fee in a straight line. The effective rate is independent of the amount.
- Stated rate: moves the EMI and the interest total. The gap to the effective rate (the fee effect) is roughly constant at a given tenure.
- Tenure: a longer tenure means a lower EMI but more interest paid. The fee is amortised over more months, so the effective rate moves closer to the stated rate as tenure grows.
- Processing fee: each extra percentage point lifts the effective rate by roughly 60 basis points at a 3-year tenure. The chart on this page sweeps 0 per cent to 5 per cent to show the slope.
Repo rate and personal loan pricing
The RBI repo rate, at 5.50 per cent after the 25 basis-points hike on 7 October 2026, is the base for floating-rate lending. Personal loans are almost always fixed-rate, so a borrower does not benefit from a cut or lose from a hike during the term. What the repo rate does is shift the lender's own cost of funds, which lenders feed through to the next cohort of borrowers. If you are shopping a personal loan shortly after a repo cut, the quoted rate may already reflect it; after a hike (like October 2026), expect the next rate card to lift.
What this page leaves out
- Pre-paid insurance bundled into the loan, which some lenders package into the disbursal. Treat it as another up-front cost and add it to the fee for an honest effective rate.
- Convenience charges, stamp paper, and the cheque-bounce schedule, which vary by lender and are not a function of this calculator.
- Late-payment interest, which starts on the unpaid amount only, not the full bill.
- Tax on interest paid: personal loan interest is deductible only where the money is used for a specified purpose like a business asset, and only then under the old regime.
- A rate reset. On a fixed-rate loan there is none; this page's arithmetic assumes the rate is held for the full term.
Frequently asked questions
Why is the effective rate higher than the stated rate?
Because the processing fee and 18 per cent GST on it are deducted from the disbursal, so you receive less money than the EMI schedule is built on. The IRR of what you receive against what you pay is higher than the quoted rate by that difference. The gap grows as the fee grows or the tenure shrinks.
What is the processing fee and the GST on it?
A percentage of the sanctioned amount, retained by the lender up front. The GST charged is 18 per cent of that fee, which is the goods and services tax rate for most financial services. The two together are billed inside the first-month deductions on the account statement.
Does the RBI ban on prepayment fees apply to a personal loan?
The 2026 ban applies to floating-rate loans to individual borrowers for non-business purposes. Retail personal loans are almost always fixed-rate, so the ban does not block a foreclosure charge there. The sanction letter will state the charge, which is usually a percentage of the outstanding.
How is a personal loan EMI computed?
By the standard reducing-balance formula: EMI equals P x i x (1 + i)^n divided by ((1 + i)^n - 1), where P is the loan, i is the monthly rate (annual rate divided by 1200), and n is the tenure in months. The EMI is charged on the gross amount, not the net disbursal.
Is interest on a personal loan tax deductible?
Only where the loan is used for a specified purpose (a business asset, under business income; the acquisition or construction of a self-occupied house, within the home loan caps; higher education, under the deduction earlier known as section 80E). A general personal loan for consumption attracts no deduction.
What does a shorter tenure do to the real cost?
Two things in opposite directions: it raises the EMI because the loan clears in fewer months, and it raises the effective rate because the fee is spread across fewer months. The quoted rate and the interest total both move; the gap between the stated and effective rates widens on a shorter tenure.
How accurate is the IRR number on this page?
The page bisects between minus 99 per cent and 1000 per cent a month, to a tolerance of one part in a billion. It was cross-checked against an independent PowerShell computation of the same cash flows for the default run, and matched to within a tenth of a basis point.
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