Personal loans are excellent financial tools, helping you to stretch your budget a bit beyond what you could normally buy right now. You can use them for home repairs, debt consolidation, quickly stocking an emergency fund, to make a large purchase, and more.
Of course, like with any loans, you have to be aware of the costs involved with personal loans — specifically, fees.
Below, we’ll go over the three most common personal loan fees, as well as several less common fees that you should still watch out for. Then, we’ll wrap up by discussing how to avoid these fees.
Types of Personal Loan Fees
Personal loans are a bit simpler than other loans — such as mortgages and auto loans — so they don’t often have a long list of fees. Here are a few of the most common fees to watch out for.
1. Loan Origination Fee
Nearly all lenders charge a loan origination fee as a percentage of each personal loan, as this fee covers loan processing costs and customer service involved in loan servicing.
The loan fee percentage varies between lenders, and it also depends on the borrower. That said, it generally falls between 1% and 8%.
To determine the loan fee percentage, lenders will look through your credit history and, sometimes, your financial history as well. They’ll also use the repayment terms and other information on your application to determine the final loan origination fee.
Now, lenders take the loan origination fee directly out of your loan proceeds. That means you have to take out a larger loan to get the amount you want— and thus pay a higher fee.
For example, if you needed a $10,000 loan with a 2% origination fee, you’d only receive $9,800. But let’s say that if you went up to $10,200, that fee increases to 3%. To get precisely $10,000 after fees, you’d need to take a $10,300 loan.
2. Late Fee
The late fee is one of the simplest and most common types of fees you’ll find on any loan, not just personal loans. If you fail to make a payment on time, you owe a late fee.
On personal loans, the interest is already built into your monthly payment. Thus, the lender must charge you a late fee instead of interest.
This is a little different than credit cards. You can make your minimum payment on time on credit cards but still incur interest (which is added to the balance) if you still carry a balance.
Anyways, some lenders will charge a fixed late fee, while others may make it a percentage of your outstanding loan balance.
3. Prepayment Penalty (cover sliding scale fees)
Some lenders charge prepayment penalties on loans. If you pay off your loan early, and your loan has one of these fees hidden in the fine print, you’ll owe the lender extra cash.
Now, you may be wondering why lenders penalize you for paying back the loan early. After all, they’re getting their money back faster, and you’re showing how responsible of a borrower you are.
The thing is that your lender wants you to take the full repayment term to pay your loan back because they make money on your interest payments. When you pay off your loan ahead of schedule, your lender loses out on potential revenues. Thus, they offset their losses (and discourage you from paying off your loan early) through prepayment penalties.
Some lenders charge fixed prepayment penalties, meaning you’ll pay the same amount whether you pay it off a month after getting the loan or a month before the final payment.
But other lenders are fairer and charge on a sliding scale.
For example, say you owe $10,000 over a 5-year term at 5% interest. You pay it off over the full five years, paying that 5% rate.
Now imagine you pay it off in 2.5 years. Your lender might charge a prepayment penalty equivalent to paying 10% interest over those 2.5 years.
And if you tried to pay it off even earlier, that would only increase.
Other Less Common Personal Loan Fees
- Broker fee: If you use a broker to find you a personal loan, you may owe them a fee. Using loan aggregation sites like Fiona or Credible can help you avoid broker fees while browsing plenty of options fast.
- Card payment fee: You may owe a small fee if you pay via debit card (and your lender allows you to) and charges a fee for it.
- Annual fee: Some lenders (but not many) tack on an annual fee to your loan.
- Check handling fee: If you pay your loan by check, you may owe a small fee.
- Credit insurance: Some lenders offer credit insurance, which covers you due to unexpected events preventing you from making payments. This costs a few dollars a month.
- Paper copy fee: In some cases, you may pay $5-$10 if you ask for a hard copy of the loan agreement.
Can You Avoid Personal Loan A Fees?
Avoiding late fees is easy — pay your loan on time, every time, and you’ll never get hit with late fees.
You can’t really avoid loan origination fees, though, as nearly all lenders charge them. However, you can minimize the loan origination fee by working on your credit history, keeping your score high, and maintaining stable finances.
With all that in mind, the best thing to do is to read the fine print of your loan contract. That’s where lenders try to sneak in more fees, such as the prepayment penalty.
Know what kinds of fees you might owe, then take action to minimize those. That origination fee won’t be a big deal if you can secure a great rate on a loan and avoid the other fees. Do it right, and you’ll be able to find the best personal loan for you.