Personal loans offer a convenient way to manage finances, from consolidating debt to covering unexpected expenses. However, unlike the fixed interest rate you see advertised, various fees can impact the actual cost of a personal loan. While some lenders are transparent about their fees, others might bury them in fine print. Awareness of these hidden charges can save you money and ensure you choose the right lender for your needs.
Watch Out for These 5 Personal Loan Fees When Selecting a Lender
1. Application Fee
Not all lenders charge an application fee, but some do. This fee, typically between $25 and $50, covers the costs of processing your loan application, including reviewing your financial information and verifying your identity. This fee is usually non-refundable, even if you decide not to proceed with the loan after applying.
While some lenders may present the application fee as a standalone charge, others might bundle it into a broader origination fee (which we’ll discuss next). Be aware of this potential upfront cost and factor it into your loan comparison process.
2. Origination Fee
Most lenders charge an origination fee to fund the costs of processing and underwriting your loan. When you secure a personal loan, this fee is calculated as a percentage of the loan amount, ranging from 1% to 8%. For instance, on a $10,000 loan, a 2% origination fee would amount to $200.
There are two ways lenders handle origination fees:
Deducted from the loan amount: If the fee is deducted from the loan amount, you would only receive $9,800 upfront.
Added to the loan amount: You would receive a total of $10,000, but you would be charged interest on the entire amount, including the $200 origination fee.
These fees can sometimes be disguised with terms like “administrative fee” or “processing fee,” so read the fine print carefully.
3. Prepayment Penalty
Some lenders penalize borrowers who pay off their loans early. This prepayment penalty, also called an “exit fee,” is designed to compensate the lender for the lost interest they would have earned over the entire loan term. These penalties can be a set fee or a percentage of your remaining loan balance.
Not all lenders charge prepayment penalties. If you think you might be able to pay off your loan early, prioritize finding a lender who doesn’t penalize you. It can save you a significant amount of money in the long run.
4. Late Fee
Missing a loan payment can be costly. Most lenders charge a late fee, typically ranging from $25 to $50 or 3-5% of your monthly payment amount. For example, if your monthly payment is $200 and the lender charges a 4% late fee, you’ll be charged an extra $8 for that month’s missed payment.
Late fees are a double whammy:
Out-of-pocket expense: The late fee itself adds to the amount you owe.
Credit score damage: Late payments reported to credit bureaus can negatively impact your credit score for up to seven years.
Enabling automatic payments can ensure you never miss a due date.
5. Payment Processing Fee
While less common, some lenders may charge a payment processing fee on top of your regular monthly payment. Some lenders may charge a fee to process paper checks submitted as loan payments. In today’s digital age, most lenders encourage electronic payments (such as bank transfers or automatic debit) to avoid this fee.
A few lenders might incentivize automatic payments by charging a fee for manual payments. If you need to make a loan payment via wire transfer, there’s usually a processing fee associated with this expedited method, typically around $15 per transaction.
When you secure a personal loan, the best way to avoid payment processing fees is to be aware of the lender’s payment options and choose the most cost-effective method.
Conclusion
Securing a personal loan can be prudent for achieving your financial goals, but some fees can inflate the actual cost of borrowing. You can be a smarter loan shopper by keeping an eye on the five fees we discussed. Carefully compare offers, factor in all fees, and prioritize lenders who are transparent about their costs. A little legwork upfront can save you significant money in the long run.