Personal loans are useful when it comes to consolidating debt, financing large purchases, and handling emergencies. The end uses are nearly endless. However, there are many fees and charges that can catch you off guard.
In this article, we’ll go over the unexpected fees you should keep an eye out for when applying for a personal loan.
The interest rate is a percentage of your principal loan–the amount you borrowed. When you sign a loan agreement, you agree to a designated interest rate. For personal loans, the interest rate is typically within the range of 5% to 36%. The average interest rate is around 11%.
Interest rates may be variable or fixed, simple or compound. A variable interest rate fluctuates determined by market conditions and other factors, with most lenders choosing variable rates based on the prime rate.
Throughout the life of your loan, a fixed interest rate remains the same as the percentage you agree to upon signing the loan agreement. An unchanging interest rate helps provide predictability in terms of how much you need to pay your lender each month. However, fixed-rate loans usually have higher interest rates than the initial rate of variable-rate loans.
How interest rates affect fees and charges
Your interest rate greatly affects how much taking out a personal loan costs. Here are the most important fees and expenses that are influenced by your interest rate.
- The overall cost of obtaining the loan: The interest rate determines how much you pay your lender in interest. A higher interest rate means you will have to pay more in interest over the loan tenure.
- Your monthly payments: When your loan tenure isn’t changed, having a higher interest rate means your monthly payments will cost more, whereas a lower interest rate lets you pay less each month.
- The annual percentage rate (APR): The APR is a more accurate measure that expresses how much taking out your loan costs each year. It includes the interest rate as well as other fees and expenses.
What affects your personal loan interest rate?
Many factors affect the interest rate of each individual who wants to take out a personal loan. While each lender has their own way of determining personal loan terms and conditions, here is what you can typically expect to influence your loan’s interest rate.
- Your credit score and history
- Income and debt-to-income (DTI) ratio
- Loan amount
- Loan tenure
- Employment status and type
- Market conditions, such as the inflation rate
After you apply for a personal loan, some lenders will charge an origination fee. The origination fee can be a flat fee from $20 to $50.
The origination fee can cover a variety of costs for the lender, such as:
- Processing the loan
- Administrative expenses
- Credit score inquiries
- Underwriting to assess the risk of lending a borrower money
- Generate revenue for the creditor
- Offset the risk and costs of loan defaults
Not every lender imposes an origination fee. For larger loan amounts, the presence of an origination fee generally does not factor into whether someone chooses a particular lender over another. However, if you’re short on money and need fast funds, you may want to look for a lender without an origination fee.
Late payment fees and penalties
Being late on your repayments means incurring various penalties, including late fees.
A late payment fee is often a flat fee from $20 to $50 or around 5 percent of your loan’s monthly payment amount. While the good news is that late fees can’t legally be unreasonably high, multiple late fees can accumulate quickly.
If you’re late on your monthly payment, your balance for the next month will be higher. The higher balance means you will be charged more in interest until you make up for the late payments.
The serious penalty that comes with being late on your monthly payments is you risk defaulting on your loan. A loan default for a personal loan means grave consequences, such as:
- Any assets you put up as collateral can be seized by the lender
- The lender can sell your debt to a third-party debt collection agency
- Your credit score will take a substantial hit
- Your future loan eligibility will be negatively impacted
Prepayment penalties and fees
Paying your debt off early sounds like a great plan, but be wary of possible prepayment penalties. You may encounter a prepayment fee if you finish paying off your loan early before the designated repayment term is over, or if you make extra payments before the end of your loan to speed up the repayment process.
While prepayment fees are considered outdated by some lenders, others do still charge them. If you plan on trying to repay your loan early, it’s a good idea to see if your loan terms include any prepayment penalty.
Annual fees and charges
Your annual percentage rate (APR) expresses how much you are charged every year for your personal loan. The APR reflects both your interest rate and extra fees. For personal loans, it can be either fixed-rate or variable-rate.
Fixed-rate APR: When you agree to your loan terms, the designated APR is locked in. That is the APR that will be used throughout the life of your loan.
Variable-rate APR: The APR varies based on the prime rate, determined by the Federal Reserve. It can fluctuate up and down, making your annual fees and charges less predictable than if you had a fixed-rate APR.
Other annual costs
Some lenders will charge a personal loan annual fee. This fee covers various expenses on the lenders’ part, such as administration costs, collecting payments, and servicing the loan. You typically won’t encounter a loan with an additional annual charge that exceeds $100.
Application fees and charges
Other than origination fees, there may be other application fees when you apply for a personal loan. These are meant to cover the costs of processing a loan application, which include expenses such as making a hard inquiry of your credit score, checking your credit and employment history, and verifying the veracity of your documents.
It’s good to know that application fees are usually one-time, non-refundable charges. Some lenders choose a fixed application fee for all personal loan applications, whereas others may charge a percentage of your loan amount. In the latter case, the larger your loan amount, the more you can expect to be charged for the application.
Fortunately, lenders will usually disclose all the fees that are associated with your loan application process before you formally apply for a personal loan. Make sure to review the various fees that are associated with the application, especially if you are seeking a high loan amount. Some application fees are a percentage of your loan, which could end up being rather high.
Credit check fees and charges
Credit scores and histories are essential factors in determining if the loan is accepted, the amount of the loan, and the interest rate. A good credit score means a higher chance of your loan application being accepted and a greater likelihood of you receiving favorable terms.
When lenders make an inquiry to see and review your credit, there may be costs associated with this process. This is why there might be credit check fees you need to pay–they will cover the cost of obtaining your credit report from credit bureaus, as well as the effort put into reviewing your credit history.
Like other application fees, credit check fees are typically a one-time charge when you apply for a personal loan. A credit check fee is usually fixed, which means it is determined by the lender for all applicants.
Most credit check fees are non-negotiable. This means that you won’t be reimbursed even if your personal loan application gets rejected, or you decide to not sign the final loan agreement. Once you pay the credit check fee, know that it will likely not be returned.
Is there a credit check fee if I apply with multiple lenders?
Even if you submit more than one personal loan application with the same documents and information, each lender can conduct its own application process, document verification, and credit check processes. This means that you will probably have to pay credit check fees for each and every loan application you make.
If you are shopping around for a personal loan and are worried about your credit score taking a hit or paying too much in credit check fees, you might want to search for pre-approval checks. Getting pre-approved means a lender will do a soft credit inquiry, which doesn’t affect your credit score and may not involve a credit check fee.
Overdraft fees and charges
When your bank account gets overdrawn, which may occur if a transaction exceeds your remaining available funds, you can be charged an overdraft fee. This kind of fee is not typically associated with personal loans. However, some personal loan cases can still have you getting charged for an overdrawn account.
Some lenders allow you to set up an auto-payment feature so that they can directly take repayment installments from your bank account each month. If your bank account does not have sufficient funds, you may be charged an overdraft fee. If you are worried about an overdraft charge, it might be a good idea to carefully consider whether you should set up automatic payments.
Before you link a bank account to your lender, make sure you review their terms (as well as your bank’s terms) to understand any potential overdraft fees.
Collection fees and charges
Collection charges are associated with efforts made to collect your monthly payments or debt. If you don’t make timely payments on your loan even after a certain grace period, you may be charged a collection fee.
Before agreeing to your loan, it’s advisable to review the collection terms, which should designate when collection efforts will be made. Many collection fees are applied if you miss multiple payments and/or if your loan goes into default.
Collection fees may be either a fixed amount or a percentage of the outstanding balance that you haven’t paid yet. If it is a percentage, it is often a good idea to pay as much of the remaining balance for a monthly payment as possible even if you cannot afford the entire installment. Lenders and collection agencies typically have legal limitations that prevent them from charging excessive collection fees.
What do debt collectors do for personal loans?
If your loan goes into default, it might be sold to a debt collection agency or sent to an in-house debt collector. Debt collectors might charge you additional collection fees other than the lender’s initial collection fee.
A collector may send you messages, contact you online, make phone calls, and make other efforts to get you to pay the debt. They may also take you to court, suing you for the outstanding balance.
Are collection fees the same as late fees?
Late fees are meant to dissuade the borrower from being late on their repayment schedule. On the other hand, collection fees are meant to cover expenses incurred during the collection process.
Early repayment fees and charges
If you make payment installments early or finish repaying your personal loan before your loan tenure ends, you might be charged extra for early repayment. These fees are also known as prepayment and early exit fees.
An early repayment fee is meant to protect the financial interests of personal loan lenders. Since they will receive less money in interest if a borrower pays off the loan early, this early exit fee can help offset their potential losses.
The early repayment fee can vary, but it is often calculated as a percentage of the remainder of your loan balance. It could also be a fixed fee. Either way, the structure should be detailed in the loan agreement you sign.
If you anticipate paying off your loan as soon as possible, resulting in an early repayment, you might want to negotiate the prepayment terms and conditions with your lender before you sign the agreement. This could help you secure more favorable terms.
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