5 Personal Loan Fees to Know: Borrow Smarter
You find yourself in a crunch and have to take out a personal loan. You tell yourself that it is no big deal and you can pay it back easily and quickly, so you go to your nearest short term loan lender to apply. It should be simple enough. Just fill out some paperwork and get money transferred into your bank for the money you need, right?
In a perfect world, you are probably right. In reality, however, it is a much more complicated and, often, expensive process than you think. Suddenly you see charges for things you had no idea are involved in this little loan you need. Before you apply for a loan, there are some personal loan fees to know so that you are not blindsided.
Personal Loan Fees to Know
There are five basic types of loan fees: application fees, administrative fees, personal loan origination fees, personal loan late payment fees, and prepayment penalties. Read on for more details on each.
1. Application Fee
Some lenders charge an application fee to cover the cost of running your credit. These fees are usually not very expensive as they tend to cost less than $50, but they do add up if you have to put in multiple applications. Also, it is a waste of money if you do not get approved for the loan. Try to find a lender that does not charge an application fee or at least a loan you are fairly certain you will qualify for. It is an extremely contradictory effort to pay to get money that you will not get. If you waste money on application fees, you will then need not only the loan amount you initially needed but also to replace the application fee.
2. Administrative Fee
Administrative fees are another type of personal loan fee to know. This fee covers the cost of processing your paperwork for the loan. It may include the application fee or the two fees may be separate. Not every lender charges administrative fees so look for one who does not.
3. Personal Loan Origination Fee
There are lenders that charge what they call a loan origination fee. Instead of paying separate application and administrative fees, a loan origination fee covers the cost of the application, processing your information and paying out the funds. This is an upfront fee for taking out a loan. It does not come out of your pocket, though, like the others. Instead, it comes out of your loan.
What does this mean for you? If you apply for a $2,000 loan and the lender charges a 10% origination fee, the actual amount you receive will be $1,800. If you only need $1,800, this may not be a problem for you. However, if you need the full $2,000, you have to ask for a larger loan. Origination fees may vary from lender to lender, so when personal loan shopping it is important to determine who charges origination fees and how much that fee amounts to.
4. Personal Loan Late Payment Fee
Like every other bill, if you are late on a personal loan payment, you will owe a late payment fee. The amount of this fee will vary from lender to lender. It may be a set amount, like $30 for every late payment, or it may be a percentage of what you owe. The exact details should be in your loan paperwork when you first take out the loan. If you cannot find these details, speak with your lender.
5. Prepayment Penalty
“Ok, I’ll take out this loan and pay double payments every month to pay it off early.” That is what I think every time I have to take out a loan. Does it sound familiar to you? Maybe not, but it does sound smart. Surprisingly, it may not be. Some short term loan lenders may actually punish you for paying your loan off early because prepayment costs them money. Personal loan shopping online may help you find a lender that does not charge a prepayment penalty.
How to Avoid Personal Loan Fees
The simplest way to avoid these fees, besides not taking out a loan, of course, is to find quick cash loans that do not charge any fees. It is simpler than you might think. Loans are a competitive market and many lenders cut the fees to attract clients. Personal loan shopping for no fees can help you find these lenders.
Things to Know Before Getting a Personal Loan
Taking out a loan is a big decision that should not be taken lightly. Consider it heavily before you apply and before you sign any paperwork. Below are some things you need to know and pay attention to before getting a personal loan.
Your Financial Situation
Your credit score, income, and ability to repay are all considered when you apply for a loan. Before you speak to a lender or put in an application, know your financial situation yourself. Knowing how much of a payment you can afford and how your credit looks can lead you to the right lender and the right amount you should borrow. The knowledge can also give you the confidence you need to negotiate loan terms.
The Full Cost of the Loan
Just because you are borrowing $3,000, do not think that is all you will be paying back. Between the fees and interest, the cost will be exponentially more. Let’s look at an example:
I decide that I need $3,000 to cover repairs to my home, so I take out a quick cash loan. The lender charges a 5% origination fee and my interest rate is 10% for each year I have the loan. Because there is an origination fee and I need the full $3,000, I have to increase my loan request amount to approximately $3,158. This makes my interest $315.80 each year and the total I have to pay back $3,473.80.
The origination fee added $173.80 to my loan. The $473.80 that I have to pay back in interest and fees is almost one-sixth the amount of the money I borrow.
Understand what your loan will cost along with all additional fees so you can be realistic about paying it back.
How Taking Out a Loan Will Affect Your Life
Monetary costs are not the full extent of what you will pay for the loan. Unless you have a great deal of money lying around, in which case you would not need the loan, you will have to make sacrifices to pay it back. Think through these sacrifices you and your family will have to make and decide if it is worth the cost.
For instance, in the above example, I took out a loan and now I need to pay back $3,473.80. If that is spread out evenly for 12 months, my monthly payments are $289.49. Since my current income and outgoing money only allow a $150 payment, I have to figure out where that extra $139.49 is coming from. Will I pick up a second job and miss quality time with my kids? Will we have to temporarily stop saving for my teenager’s college for the year? Can we cut back on groceries or household items? The bottom line is that I have to cut something out or add to my income, at least until the loan is paid off. Each person will have to decide if the cost of taking out the loan is worth the changes that must take place.
A Short Term Loan is Not a Long Term Solution
So, you received your loan. Time to breathe a sigh of relief, right? No, not really. While that loan may be fixing your current situation, you have to understand that the present is all that it will fix, not the future. My $3,000 loan may fix my plumbing and leaky roof now, but what happens if the air conditioning goes out in a month or the car breaks down?
Since there is no extra money because I am paying the current loan, I cannot fix the new problems with out-of-pocket cash. Most likely, I have to take out another loan, if I can, to cover the new expenses, which then leads to figuring out how to pay the new loan. When something else happens three months down the line, the cycle just continues.
What Traps to Avoid When Getting a Personal Loan
A lot of borrowers fall into traps when taking out a loan. These traps tend to fall into two categories: not being aware of the full scope of the loan and biting off more than they can chew. Below are some traps to watch for:
Not Understanding Your Interest Rate
Interest is a huge part of loans and not understanding it is a mistake. There are a few ways to calculate interest and borrowers need to know what type of interest they are paying.
Compounded interest is interest that is piled on top of interest. The only way to lessen it is to pay more each month than what is due, pay early payments, or pay the loan off.
Simple interest is calculated according to the amount of the loan, the length of the loan and the rate. If your loan is a total of $5,000, the length of the loan is one year, and your interest is 2%, you would pay $100 in interest for each year that loan is out.
Pre-computed interest is calculated at the beginning of the loan and added into the monthly payment. With pre-computed interest, a certain amount of each payment is applied to the interest while the rest is applied to the actual loan. Sometimes, you pay the entire interest off before anything is applied to the principle. It depends specifically on how each particular lender sets it up.
It is important to know and understand the type of interest connected to your loan as it affects how much interest is paid and how extra payments might affect your payment. Not knowing means you may get surprised when you feel like you have paid more than enough only to learn that you did not really make a dent due to the interest.
Not Knowing What Fees You Will Pay
Another trap is in not knowing what fees are included in your loan. There may be no fees or there could be tons of fees. Either way, you need to be aware of them.
It is reckless to ignore penalties. Any associated your loan can cost you if you ignore them. You do not want to get charged for something you were not even aware of.
Taking Out More Than You Need or Can Pay Back
This may seem like common sense, but many people fall into this trap. They get a higher amount and convince themselves that they can pay it back. Most of the time, though, they probably cannot. Be honest with yourself about your capabilities. If you can only afford a $100 payment per month, do not take out a loan on which you have to pay $500 a month. You will be digging yourself into a much deeper hole.
How to Get a Personal Loan
One important step in getting a personal loan is finding the right lender. The easiest way to do this is through online lender search sites that help you locate a lender that may suit your personal needs.
Regardless of which lender you use, you will need to have a few things handy. Identification, proof of address, and proof of income are definitely on that list. Others may include references, tax returns, and other assets. When you choose a lender, ask if they need any additional documentation.
If approved, read every contract document included before you sign. If you have any questions, ask the lender for clarification. Be sure that you receive a copy of the full contract.
Taking out a loan can be a daunting task. There are personal loan fees to know, different interest rates to understand, varying loan terms, etc. Just take a deep breath. This is a big decision so do not rush into it. Educate yourself on your options and use a site like loanry.com to find a lender based on what may be relevant and available to you.
Brandy Woodfolk is an educator, home business owner, project manager, and lifelong learner. After a less than stellar financial upbringing, Brandy dedicated her schooling and independent studies to financial literacy. She quickly became the go-to among family, friends, and acquaintances for everything finance. Her inner circle loves to joke that she is an expert at “budgeting to the penny”. Brandy dedicates a large portion of her time to teaching parents how to succeed financially without sacrificing time with their little ones. She also teaches classes to homeschooled teenagers about finances and other life skills they need to succeed as adults.
Brandy writes about smart money management and wealth building in simple and relatable ways so all who wish to can understand the world of finance.