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A personal loan can be a convenient way to get money when you need it but there’s one caveat: you’ll need to pay it back. This means paying interest on the amount you borrow but you may also be on the hook for certain fees as well.
Personal loans can include a variety of fees which can increase the total cost of borrowing. If you’re considering applying for a personal loan, here are some of the most important fees and charges to be aware of.
1. Application fees
Some lenders can charge an application fee when you apply for a personal loan. This is usually a small flat fee, which may range anywhere from $25 to $50.
Lenders may charge this fee to cover the costs of processing your loan application. For instance, if a lender has to pay a fee to perform a hard pull of your credit, they may charge an application fee to pass this cost on to you. If you’re weighing a loan with an application fee in the balance, consider how likely you are to be approved before handing over money to apply.
2. Origination fees
Origination fees can be tacked on to a variety of loan types, including mortgages, auto loans and personal loans. A personal loan origination fee is essentially a fee the lender charges to underwrite the loan. Typically, these fees are set as a percentage of what you borrow and they’re deducted from the loan proceeds.
For example, say you’re taking out a $25,000 personal loan with a 5% loan origination fee. The fee would work out to $1,250. This amount would be taken off the top of the loan amount so that when the proceeds are paid to you, you’ll receive $23,750. If the loan you plan to apply for charges an origination fee, you may need to adjust the amount you borrow to account for the added cost.
3. Late payment fees
Paying a personal loan late can be damaging to your credit score but it can also cost you money if your lender assesses a late payment penalty. Depending on the lender, a personal loan late payment fee may be a flat dollar amount, such as $25 or $50, or it may be a percentage of the loan amount.
You can avoid late payment fees by setting up automatic payments to your personal loan each month from your bank account. Setting up loan payment due date reminders can also help you keep track of when it’s time to pay.
4. Insufficient funds fees
If you make a payment to your personal loan that’s returned, your lender could charge an insufficient funds fee. This is essentially a penalty fee you pay for not having enough money in your account to cover the loan payment. Insufficient funds fees may be anywhere from $20 to $50.
Keep in mind that your bank may also charge you fees for making a payment that your account doesn’t cover. That can include returned item fees or overdraft fees.
5. Credit insurance fees
Credit insurance is an add-on benefit that personal loan lenders may offer. Also referred to as payment protection insurance, this type of coverage makes your monthly loan payments for you in certain situations. For example, if you lose your job or become temporarily disabled, your insurance would kick in to make the payments so you don’t fall behind.
The cost for this protection is usually just a few dollars a month but that can add up over the entire life of the loan. Before adding on credit insurance, consider whether you really need it, based on how likely you think you are to be able to pay the loan as scheduled.
6. Prepayment penalties
Paying a personal loan off early could save you money on interest. But it’s important to remember that your lender makes money off the interest you pay. If you pay a loan off early, your lender might try to recoup some of its losses by charging a prepayment penalty.
Prepayment penalties can apply when you pay your loan off before the end of the loan term. Your lender may charge a flat fee or anywhere from 1% to 5% of the loan amount. Whether it makes sense to pay this fee depends on how much it is and how much you stand to save in interest by paying the loan off early.
Compare Loan Fees Carefully
The best way to sidestep any of these personal loan fees and charges is to choose a lender that doesn’t add them on. But finding completely free loans may be difficult, as most lenders at least charge late payment fees or insufficient funds fees. Taking time to shop around can help you find the most fee-friendly personal loan option.