Loan Fees 101

Borrowing, Personal Loans & Lines of Credit

Many sources are available to define and outline the fees that are associated with mortgage loans, but what about personal loans? Generally, personal loans are unsecured loans that are not tied to any form of collateral that can be taken over by the lender in case of default, such as a house with a mortgage loan or a car with a dealer-financed auto loan.

Potential loan fees in these cases are similar to mortgage and auto loans, except that fees relating directly to the collateral do not apply (think dealer delivery charges for an automobile or appraisal fees for a mortgage). Here are the personal loan fees that you are most likely to encounter.

  • Origination Fee – Just as in a mortgage loan, an origination fee is essentially a fee that covers the lender’s costs of processing the loan. Origination fees are usually a percentage of the amount of money that you are borrowing and can range from below 1% to as high as 6% of the loan amount. Origination fees are generally deducted from the loan amount before you receive it, so keep that in mind when you select the amount to borrow.
  • Late Payment Fee – Failing to make payments on time usually results in flat fees in the $10 to $15 range, or a fee as a percentage of your outstanding balance. Percentages are attractive to banks since the larger your remaining debt is, the more the bank stands to lose if you fail to make payments.
  • Unsuccessful Payment Fee – Payments that fail to go through, such as automatic withdrawals that are rejected by your bank for insufficient funds, usually incur a penalty fee. They tend to be flat amounts similar to late payment fees, but can be charged multiple times if the lender makes two or three attempts to process the payment — so take great care that you have enough in your account at all times to cover automatic withdrawals.
  • Check Payment Fee – In the age of direct deposit and electronic transfers, lenders look at checks today like bank tellers did years ago when you brought in a huge jar of pennies to redeem. They are considered inconvenient and not worth the hassle. As a result, lenders may charge convenience fees for you to pay by check.
  • Prepayment Fee – Lenders make money off your interest payments and paying off a loan early deprives them of that income. A personal loan lender may charge a penalty fee for paying off your personal loan early, just as some mortgage lenders do. If you intend to try to pay ahead or pay early, check for a pre-payment penalty clause.

Other, more unusual fees may exist — so carefully review any personal loan contract before you sign.

Some lenders offer loans with no fees, and they do so for a reason. A no-fee loan sounds like a great deal, and it may be — but that depends on the interest rate and other terms of the agreement. If there is no origination fee, the costs that the lender incurs will be spread out throughout your payments as part of the interest rate they charge or captured in other fees.

That interest rate may still be a good deal with a no-fee lender, because the interest rate that a lender can afford to charge depends on many different factors — but the point is that any competent lender will structure your fees and payments to cover their income along with a comfortable profit margin. Lenders usually provide an annual percentage rate (APR) or the total amount repayable (TAR) for comparison, but make sure to check on whether the quoted number includes origination fees. (Other fees are essentially penalties and should not be included in rate and payment estimates.) The interest rate you’re offered may depend on your credit score. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.

The most important thing is to read and understand all of the terms associated with your loan. If there is something that you do not understand, ask for clarification. If you do not receive clarification, do not sign. A lack of understanding can lead to a severe lack of dollars in your bank account.

If you are interested in a personal loan, visit our curated list of top lenders.

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