Personal Loan Fees Explained: What to Watch For and How to Avoid Them

What Are Personal Loan Fees?

Personal loans often come with more than just interest. Lenders may add various fees and charges to the total cost of the loan, which can increase your overall borrowing expense. The Consumer Financial Protection Bureau (CFPB) notes that personal installment loans may include fees and charges added to the cost of the loan, in addition to interest.

Understanding these fees is crucial because they can affect your APR and the amount you actually receive. This guide explains the most common personal loan fees, how they work, and ways to avoid them.

Sources: Consumer Financial Protection Bureau

Common Types of Personal Loan Fees

Here are the most common fee types you might encounter:

• Origination fee: A one-time upfront charge deducted from loan proceeds.
• Late payment fee: Charged when you miss a payment deadline, often with a grace period.
• Failed payment fee: Also known as returned check or insufficient funds fee, charged when a payment attempt is rejected by your bank.
• Prepayment penalty: A fee if you pay off your loan early, though many lenders do not charge this.

Sources: Upgrade, Discover

How Origination Fees Affect Your APR

Origination fees are one of the most common fees on personal loans. They are a one-time, upfront charge deducted from the loan proceeds, which increases the total borrowing cost. For example, Upgrade charges origination fees ranging from 1.85% to 9.99% of the loan amount. Many lenders have comparable ranges, with typical fees between 1% and 10%, though some may go as high as 12%.

Because origination fees are deducted from your loan amount, the total cost of borrowing is higher than the advertised interest rate alone might suggest. This is why the Annual Percentage Rate (APR) is a more accurate measure of a loan's cost: it includes both interest and certain fees, making it easier to compare different offers. When you see an APR, it already accounts for the origination fee, so comparing APRs can help you understand the true cost of the loan.

Sources: Upgrade, Discover

Prepayment penalties and when they apply

To find out if a prepayment penalty applies to your loan, review your loan agreement carefully. Lenders that do charge such penalties should disclose them in the terms. If a prepayment penalty exists, paying off the loan early could add to your costs, potentially offsetting savings from reduced interest. Therefore, it's important to be aware of these terms before you decide to pay off your loan early.

Sources: Upgrade, Discover

Late Payment and Returned Payment Fees

Late payment fees are charged when you miss a payment due date. For example, Upgrade charges a late fee of up to $10 if full payment is not received within 15 calendar days of the due date. Beyond that grace period, you may incur the fee.

A returned payment fee, also known as a failed payment fee, is charged when your bank rejects a payment attempt, typically due to insufficient funds. Upgrade typically charges $10 for such failed payments. To avoid these fees, it's essential to keep track of payment due dates and ensure your account has sufficient funds when you schedule payments.

Sources: Upgrade

Fee-Free Personal Loans: Do They Exist?

The existence of fee-free personal loans depends on the lender and the specific fees in question. While many lenders charge some fees, it is possible to find loans with no origination fee or no prepayment penalty. For example, Discover promotes personal loans with no origination fee and no prepayment penalty.

However, even loans marketed as 'no-fee' may still include late fees or other charges. Therefore, it's crucial to read the loan agreement thoroughly and ask the lender about all potential charges before signing.

Sources: Discover

How to Compare Personal Loan Offers Including Fees

When comparing personal loans, you should not focus solely on the advertised interest rate. Instead, look at the APR, which incorporates certain fees, and consider the impact of all applicable fees on the total cost of the loan. A lower APR with high fees may be more expensive than a slightly higher APR with no fees, depending on the loan amount and term.

Here are steps to compare offers effectively:

• Look at the APR, which includes origination fees and certain other charges.
• Check whether the lender charges an origination fee and what percentage it is.
• Ask about late fees, failed payment fees, and any other potential charges.
• Calculate the total cost of the loan, factoring in all fees and interest over the loan term.

Sources: Consumer Financial Protection Bureau, Upgrade, Discover

regulatory fee limits for consumer loans

Under federal Regulation Z, a finance charge includes any charge payable by the consumer and imposed by the creditor as an incident to or condition of the extension of credit. This means that many fees are considered part of the finance charge and must be disclosed to you.

Some states impose specific limits on fees. For example, California law permits creditors to charge an administrative fee of up to $75 on consumer loans over $2,500 but less than $5,000, in addition to the maximum rate of charges. This is just one example; regulations vary by state. It's wise to check your state's laws to understand what protections you have.

Sources: California Department of Financial Protection and Innovation, Consumer Financial Protection Bureau