What Do Personal Loans Cost You: Interest, Fees and More
You may have some idea of what a loan is, but may not know much about the details. If you have never had the need for a personal loan, you may not know much more about personal loans other than you borrow money from a bank. If you are considering a personal loan, you may have a lot of questions. I plan to answer all of those for you in this article. I will address every aspect of a loan including personal loans cost, interest, and fees.
What Is A Personal Loan?
While it is important to understand personal loans cost, it is almost more important that you understand how a personal loan actually works. In the simplest description, a personal loan is when a lender allows you to borrow money. They attach a fee in the form of interest to the loan for allowing you to borrow the money. The lender can be a traditional bank, a credit union, or even a friend or family. You can also obtain a personal loan online. When the lender agrees to let you borrow their money, you are agreeing to repay the money. You agree to pay the money back by making regular payments for the term of the loan. The term is typically three to five years.
One key point I would like to make, and I will make it again, is just because you can obtain a loan does not mean you should. You should consider all of your options before applying for a loan. And you should make sure you understand the details of the loan agreement, including fees and interest. You should also make sure that you can afford those monthly payments. A loan is not free money. You have to pay it back and on time. I will discuss all of these points throughout this article.
Personal Loan Cost
If you are thinking about taking out a personal loan, you should know that you not only get money when you do that, but you also have to pay for that money. Sounds illogical? But that is the reality. So, you should be aware of how much the personal loan you get will actually cost you. This cost comes in different shapes and sizes such as fees, interest and more. So let’s get into all the important questions.
Do I Have To Pay Money To Get A Personal Loans?
In general, you do not have to pay money to get a loan. There is are personal loans cost associated with loans, however, rarely to you have to pay money to get money. At least, you should not be willing to give money to a lender to find out if you are eligible to get a loan. In most cases you want to obtain a loan because you do not have money to pay for something. It does not make much sense for you to pay money when you already are short on cash.
Some lenders do require you to pay an application fee to apply for a loan. I would recommend that you look for a loan that does not require you to pay this fee. There are many loans that do not have an application fee, so I am sure there is another lender that can meet your needs. Application fees can vary from $20 to $50 and are not refundable. That means that even if you are not approved for the loan, you will not get the application fee back. You must pay the fee before the lender will process your application.
What Fees Are Associated With A Personal Loan?
I mentioned above that there is a personal loans cost when you obtain a loan. The good news is for the most part is that the fees are added into your loan, so you do not have to pay it out of pocket. The bad news is if you need to borrow a set amount of money and you ask for that specific amount and then the lender takes money off the top. I can be a frustrating place to be. I will explain this in a little more detail and give you an example with numbers to make it easier to understand.
Each lender has some fee schedule for their loans. It is important for you that you read the fine print to understand the fees. A lender is legally bound to disclose all fees and penalties to you in writing. You should ask questions if you do not understand the agreement. There are a handful of fees you should expect from any lender. Loans have administrative fees that pay for the administration and paperwork processing of the loan. Administration fees may include an application fee. Some lenders tend to combine all of the various fees into one fee called the origination fee. This typically covers the application, running your credit, processing everything and paying out the money. The most important thing to remember is what I stated above, which is this fee comes out of your loan.
Let’s Look at an Example
Here is an example with numbers. This is just an example, these are not real numbers:
You apply and are approved for a loan of $5,000. The fees total $400. The amount deposited into your bank is $4,600. This is the amount you borrowed minus all fees. Keep in mind, you have to pay back $5,000. This can be a problem if you need the full $5,000. You should understand the fee schedule before you apply so you can ensure you borrow the right amount of money.
What Is Interest Rate?
When you borrow money, personal loans cost more than you realize. Lenders add interest to the loan as a fee for letting you borrow money. The interest the lender charges you is based on your credit score. The lower your credit score, the more risky you are to a lender and the higher your interest rate will be. Each lender gets to set their own interest rate, but there are many lenders available, so you do not have to take the first offer you find.
There are a few different types of interest rates of which you should be aware. There is a fixed rate loan, a variable rate loan, and a prime interest rate loan. A fixed interest rate loan means the interest rate remains the same throughout the loan. When you make payments in the early months, you are mostly paying the interest of the loan. Then, as you pay more of the loan, you start working on the principal. If you make any extra payments, that amount goes to the principal. This helps you pay off the loan faster.
Here is an example with numbers:
When you borrow $7,000 from a lender, the principal of the loan is $7,000. The lender adds the interest rate to that. It is a percentage, such as 10 percent, of the principal amount. A lender makes money from letting you borrow money by charging you interest. When you repay the loan, you are paying on both the principal and the interest. If you do not pay enough each month to pay the interest, then your debt will not go down.
A variable interest rate loan is exactly what is seems and it changes throughout the life of the loan. It changes based on the prime rate. The interest rate changes and then changes your payment amount. These loans are locked in for a set period of time. When that ends, the interest rate can change based upon the prime rate along with your payment amount. People tend to get into trouble with these types of loans because the interest rate can increase so much that the payment amount is no longer affordable. These loans are attractive because the interest rate starts lower than a fixed rate loan.
How Does My Credit Impact My Interest Rate?
Yes, as I stated above, your credit rate causes the lender to determine how risky it is to lend you money. Personal loans cost you money based on the percentage of your interest rate. They higher your interest rate means the more money you pay each month for your loan. When you have a low credit score, it can cost you more money in the long run.
When you have a credit score above 720, you are considered to have excellent credit. You can usually get a interest rate of anywhere from 10 percent to 12.5 percent. When your credit score is from 719 to 680, then you are considered to have good credit. That means your interest rate can go up between 13.5 percent to 15.5 percent. If you have average credit, your credit score falls between 640 to 679. When your credit is in this range, you can expect interest rates from 18 percent to 20 percent. Poor credit is when you have a credit score below 639 and then you find interest rates from 28.5 percent to 32 percent.
Now, let me show you in numbers how your interest impacts your monthly payment.
I will go back to the $7,000 you borrowed earlier. When you have excellent credit, your interest rate is 10 percent. That means you are borrowing $7,7000. If you repay the loan for 36 months, you pay $213.89 per month.
When you have average credit, your interest rate goes up to 20 percent. That means you pay $1,400 in interest, so the total amount you borrow is $8,400 and your monthly payment is $233.33. Your monthly payment goes up by $20. That may not seem like a large amount but when the dollar amounts are higher, the amount you pay per month is much more.
Are There Ways To Get A Lower Interest Rate?
There are a few ways that you may be able to get a lower interest rate when you are interested in a personal loan. If you can get a lower interest rate, you can lower the personal loans cost. You can get a co signer for your loan. This is a person that promises that you will pay the loan payments on time. If you do not make your payments, the co signer of the loan is responsible for making the payments. When you do not make payments and you have a co signer, not paying the loan can have negative impacts on your co signer’s credit.
You can decrease the amount of debt that you have, which will increase your credit score. You could also get a second job to increase your income, which lowers your debt to income ratio. If you get a second job, you are able to pay down your debt faster. When you are considering a personal loan, you should do loan shopping to find the best lender with the right rate for you.
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Can I Improve My Credit?
Yes, you can improve your credit, but it take consistent work. It takes a long time to build up your credit, but it takes only a few missed or late payments to negatively impact your credit. Remember, that the lower your credit score means the higher interest rate that ultimately increases the personal loans cost. You should obtain a free copy of your credit report once a year. When you get your credit report, you should look at it for errors. If there is anything on it that is incorrect, you should have it fixed immediately. If you correct the errors on your credit report, it helps increase your credit score.
You should make every effort to pay all of your bills on time in the amount that is due. Late or missed payments are one of the top ways to cause a decrease in your credit score. When you make payments consistently on time, your credit score increases. You should also work hard to decrease the amount of debt that you have. If you are carrying too much debt, a lender will not approve to give you more debt. They do not want you to have a high debt to income ratio. They prefer it to be less than 30 percent. The best way to decrease your debt to income ratio is to increase your income or decrease your debt.
Are There Different Types Of Personal Loans?
There are different types of loans of which you should be aware. As a result, before you make a final decision on a loan, you should do some personal loan shopping. This helps you to ensure that you are getting the right loan for you. You should also take the personal loans cost into consideration when deciding on the right loan option for you. I mentioned above that you can get a loan from a traditional bank or online. You could also get a loan from a personal loan finance company. There are some things to consider when deciding between these options.
A traditional lender gives you the ability to walk into a bank and have a person help you with your loan documents. If you want to have someone that is available in person to answer your questions, this is a better option for you. However, most traditional banks may not be as willing to work with you if you do not have perfect credit. However, you can have a conversation with a person to explain why you may have less than perfect credit. They may be able to offer you a lower interest rate.
An online lender offers you convenience and flexibility. You can apply for a loan online from the comfort of your own home. And you can upload all needed documents in the same application. You often receive an answer in 24 hours and if approved, the money is in your bank account in about 24 hours after approval. An online lender may not have the lowest interest rate, but are more willing to lend money to those with bad credit.
Other Not So Affordable Loan Types
There are a few other loan types of which you should be aware. They are loans from which you most likely want to stay away. There are some occasions when they work to your benefit, but I am not going to talk about that right now. They are payday loans and fast cash loans. These loans have really high interest rates. The loans are for low amounts and short periods of time. You typically have to repay the money in full in just a few weeks. In some cases all you need to provide is a pay stub to show how much money you earn per paycheck. The lender wants to directly access your bank account to take the money from your account on payday.
What Are Secured Loans?
In addition to being able to obtain different types of loans from different lenders, there are some different kinds of loans. The most common kinds of loans are secured and unsecured loans. Depending on which of the two kinds of loans you have it may make a difference in the personal loans cost.
A secured loan is a loan that has collateral associated with it. Collateral is anything of value that can be an asset to the lender. In the event that you miss a payment, the lender can take the collateral in place of your loan. Most of the time, a mortgage is a secured loan and your house is considered collateral. An auto loan is also a secured loan because the vehicle you are buying becomes the collateral. Having an asset attached to your loan typically gives lenders the incentive to provide you with a lower interest rate. The collateral gives the lender more security when providing you the loan.
Most personal loans are considered unsecured loans and do not require collateral. This is riskier for the lender and as a result has a higher interest rate. Most of the time the personal loans cost is higher on an unsecured loan.
Are There Alternatives To Obtaining A Personal Loan?
There are some alternatives to a traditional loan that you might want to consider before obtaining a loan. Keep in mind that while personal loans cost something, these alternatives may have a cost, also. Depending on how much money you need, you could consider using your credit card to pay the bill instead of getting a loan. This may be a better route for you to go if your credit card has 0 percent interest. If you pay off the full amount during the promotional period, you will pay less money than if you obtained a personal loan.
You could consider peer to peer (P2P) loan. These types of loans are found on P2P sites that offer crowd funding. This allows you to borrow money from people instead of institutions. Many of these sites are geared towards those who have less than great credit. You may also be able to find lower interest rates on these sites. Depending on why you need the loan, you could consider a government loan. If you need a loan for higher education, you could get a federally subsidized loan that has lower interest rates and more flexible policies.
Will A Budget Help Me?
A budget is always helpful. If you do not currently have a budget, then you should create one right away. There are many benefits to having a budget. In the most basic definition, a budget is the understanding of your income and balancing your expenses. A budget gives you an understanding of how much money you spend each month and in what categories. There are many different types of budgets. The easiest one is when you list all of your income in one column and then add all the numbers in the column together. In the next column, list out all of your expenses. Do not skip over any of your expenses. Remember to list them all. If you want to create a complete budget, you have to be honest about all of your expenses.
You subtract your total expenses from your income and hopefully you have a positive number. You know that personal loans cost you money each month. When you create a budget, you can assure yourself that you can afford to make that monthly payment. The number you have left is how much you can afford to pay each month for your loan. If you have a negative number, that means that you cannot afford a loan and you should not even consider a loan. The worst thing you can do for yourself is to obtain a loan if you cannot afford to make the monthly payments.
Should I Save Money?
If you have a negative number after creating a budget, that means you need to make some adjustments to your budget. Even if you do not have a negative number, you probably still need to make some adjustments to your spending. I have mentioned this throughout this article, but personal loans cost you money. As you are creating your budget, you should keep in mind that you need to take control of your spending and make cuts where needed.
I want to talk to you about spending cuts for a moment. I know, you do not want to cut any spending. The reality is you probably have to make some adjustments. There are few of us that have a large enough income to support all of our spending and saving. Many of us have to make tough choices when it comes to saving more money. Since we already know they are going to be tough choices, you have to decide what you really want. You have to decide if you want to save more money. You have to make the choices based on what you really want because when it gets hard, you need to remember why you are making the hard choice.
There are a couple of easy ways to begin saving money. The first is have money deposited directly into your savings account with each paycheck. This way it happens automatically and you never see the money. The money never goes into your checking account and it is easier to pretend you do not even have it. Next, you can cancel and remove all of those items that you do not use. Think about that gym membership that you are not using and cancel it. Remember, personal loans cost you money. So, save some money now but cutting expenses and you may not even need to obtain a personal loan.
There are many other ways you can begin to save money. That is for another article on a different day. This article is about personal loans cost and how to reduce that cost to you. The best way I can think of is to not obtain a personal loan. Sometimes, we find ourselves in positions where we need a loan. That is ok. Do not beat yourself up for being in that position. Instead, educate yourself and find out all the information about the cost of personal loan so that you can make an informed decision. When you know as much information as possible, you can feel secure that you are making the best decision for yourself at this time.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.