Every loan comes with interest, the extra amount you have to pay for the privilege of borrowing money. The interest rates on loans can vary widely, which results in different loans, even for the same amount of money, costing a different amount.
One thing that is less known is that many loans charge fees. These fees are charged on top of any interest that you pay.
There are a variety of fees that might be included in a personal loan, such as:
Personal Loan Fees
|Type of fee||Typical cost|
|Application fee||$ 25 to $ 50|
|Origination fee||1% to 6% of the loan amount|
|Prepayment penalty||2% to 5% of the loan amount|
|Late payment fee||$ 25 to $ 50 or 3% to 5% of monthly payment|
|Returned check fee||$ 20 to $ 50|
|Payment protection insurance||1% of the loan amount|
The size of these fees varies based on the loan. Additionally, not all loans charge every fee. Some loans don’t have most of these fees. Finding the best loan involves a combination of comparing interest rates and the fees charged. Learn everything you need to know about personal loan fees and how you can minimize or avoid them.
One common type of fee that is charged by personal loan providers is the application fee. An application fee is paid when you submit your application before you even get a decision on the loan. Usually, this is a small, flat fee in the $ 25 to $ 50 range.
This kind of fee can be annoying to deal with because you might pay the fee and not even get a loan. Still, it is understandable that lenders would want to charge an application fee. Processing a loan application isn’t free. The lender has to pay employees to look over the application, pay fees for getting a copy of your credit report, and other administrative costs.
Look for lenders that don’t charge this fee. If you must apply for a loan with an application fee, make sure you’ll qualify. You don’t want to be in a situation where you’ve spent hundreds of dollars applying for loans and never got approved.
Origination fees are another common personal loan fee. They are charged when your loan is approved and the money is sent to your account.
Generally, these fees are charged as a percentage of the amount you borrow. For example, if you apply for a $ 20,000 loan that has a 4% origination fee, the fee will be $ 800. If you borrowed $ 10,000, the fee would be $ 400.
You still receive the full amount of the loan, but your first bill will show the amount borrowed, plus the fee as the balance. You’ll be charged interest on the amount of the fee as well, making this a doubly painful fee.
Usually, origination fees range from 1% to 6% of the loan’s total amount.
Lenders charge origination fees as a way to improve reduce their risk and improve profits. They also help lenders advertise lower interest rates. If lenders can make the same amount by reducing the interest rate but adding an origination fee, they can advertise the low rate to generate more business.
Prepayment fees are less common than other fees, but still, something to watch out for.
Prepayment fees are assessed when you pay your loan off ahead of schedule. So, if you took out a 3-year loan and paid it off in 2 years, you could be charged this fee.
It might seem like this fee doesn’t make sense because the lender is getting all of its money back, and early to boot. If you think about it from the lender’s perspective, it does make some sense. The lender is banking on the profit it will earn from your loan. If you pay the loan back early, the lender makes less in profit, so it wants to recoup some of the lost potential profit.
Usually, prepayment penalties amount to 2-5% of the loan amount.
If you do plan to pay the loan early, make sure any additional payments you make are being handled properly by your lender. Some lenders automatically use extra payments to cover interest charges rather than principal. In this case, you won’t pay off the loan early, even if you’re sending extra money with every payment.
For example, you have a loan with a $ 250 monthly payment. Each month, you send $ 300 to the loan. If the lender applies the full amount to the loan’s principal, the extra $ 50 will be deducted from your balance immediately. That will result in a lower minimum payment the next month, and a short payoff time if you continue with your $ 250+ payments.
If the lender applies the payments to interest, the extra $ 50 will be held by the lender. As interest accrues, the $ 50 will be used to pay it off.
The difference is significant because interest accrues based on the balance of your loan.
If you had $ 10,250 left on your loan when you made the $ 300 payment, in the first case, interest accrues based on a balance of $ 9,950. In the second case, it will accrue based on a $ 10,000 balance. Over time, you’ll pay more unless your extra payments are applied to principal.
To make sure your payments are applied correctly, contact your lender and provide explicit instructions as to how extra payments should be handled.
Late Payment Fee
Late payment fees are can be found on every type of loan, personal or otherwise. They are charged whenever you fail to make a payment on time.
Generally, these fees are a flat amount or a percentage of your usual monthly payment. These fees can be $ 25-$ 50 if they’re flat fees, or 3%-5% if they’re percentage based.
Lenders charge these fees for two reasons. One is that they want to incentivize people to make payments on-time. If late payments result in a fee, people are more likely to pay on-time. The other reason is to reduce risk. Someone who makes a late payment is more likely to default on a loan. By charging fees for late payments, lenders can recoup some of their costs sooner, reducing their risk.
Returned Check Fee
Returned check fees are sometimes known as insufficient funds fees, and usually come paired with late payment fees. These fees are charged when you try to make a payment on your loan but don’t have the cash to cover the payment.
For example, you mail a check to cover your $ 459 monthly payment, but only have $ 400 in your account. Your lender won’t be able to deposit the check. You’ll be charged a late payment fee because the lender wasn’t able to get paid. The lender will also charge a returned check fee for the costs of processing a check that wasn’t valid.
Usually, these fees are for a flat amount and between $ 20 and $ 50.
Payment Protection Insurance
Payment protection insurance (PPI) is a unique type of insurance that covers your loans. You can get PPI for any type of loan, including personal loans. The insurance will cover your monthly payments in the event that you become unable to work. PPI covers situations like illness, accident, death, or even just loss of employment.
Some lenders offer PPI but do not require it. If you feel confident that you can pay off the loan, even if your employment situation changes, it isn’t necessary to take out a policy. If it makes you feel more comfortable about the loan, it can be a good thing to do.
PPI costs vary widely and are based on your age, monthly payment, and creditworthiness. It usually costs less than 1% of your total loan amount.
How to Avoid These Fees
So, now that you know about all of the fees you might face when applying for a personal loan, you need to know how to avoid them.
Most importantly, look for lenders that don’t charge these fees. In fact, there are a lot of lenders who advertise themselves as no-fee lenders. They specialize in making it easy to apply for a loan and don’t charge you origination fees or prepayment fees.
However, even no-fee lenders charge late payment and returned check fees. The best way to avoid this is to avoid making late payments in the first place.
Note: Lenders that advertise their low fees may charge more interest. Similarly, lenders who advertise low rates might charge lots of fees.
You might find that a loan with a higher rate is cheaper because there’s no origination fee and you plan to pay it off early.
The best thing to do before you apply for a loan of any kind is to ask the lender for a full schedule of fees. This will lay out every type of fee that the lender charges, as well as the exact amount of the fee. Once you have this information, you can accurately determine the least expensive loan by comparing the total cost of the personal loans.