Do Personal Loans Have Penalty APRs?

Quick Answer

Generally, personal loans do not have penalty APRs for making late payments on your loan. However, you might get stuck paying a late fee or, worse yet, damaging your credit.

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If you make a late payment on your personal loan, you may be subject to a late fee but generally won't need to worry about a penalty annual percentage rate (APR). That's because penalty APRs are usually reserved for credit cards. If you make your payments on time and as agreed, you won't face a late fee or other penalty on your personal loan.

What Is a Penalty APR?

Annual percentage rate, or APR, is expressed as a percentage. It is the total yearly cost you pay to borrow money, including upfront and ongoing fees, finance charges and the total amount you're financing. A penalty APR is a higher interest rate applied to a credit card account that is generally triggered if your payment is 60 days past due. Like APR, a penalty APR is expressed as a percentage.

The penalty APR can be considerably higher than your credit card's regular rate and typically lasts for at least six months. Your old APR is replaced by your new rate, and your account balance is charged interest based on the new rate. Typically, penalty APRs are based on a fixed interest rate plus a benchmark rate, so when combined, the APR can be at or near 29.99%.

Common Personal Loan Fees

Although personal loans generally do not have penalty APRs, lenders may levy other fees to cover their costs when providing personal loans. However, some of the top personal loan lenders do not charge common fees.

The most common personal loan fees you may encounter include:

  • Application fee: This fee is usually paid at the time of application and covers the costs of processing and documenting your application. Application fees are typically nonrefundable even if the application is denied. This fee, taken out of the total loan amount, can vary significantly among lenders and can be as much as $500.
  • Origination fee: When you take out a loan, you might be charged a loan origination fee. This fee is typically calculated as a percentage of the loan amount and covers the cost to process and underwrite your loan. Origination fees can range from about 1% to 6% of the total loan amount.
  • Late fee: It's not uncommon for lenders to charge a late fee if you miss a payment or fail to pay your loan in full as outlined in the terms of your loan. Late fees can range from $25 to $50 or from 3% to 5% of the monthly payment amount.
  • Prepayment penalty: Some personal loan lenders may charge a prepayment penalty for paying down or paying off your loan early. This fee is often found with mortgages and may be used to cover the loss of interest income that would otherwise have been paid to the lender over time. Prepayment penalties can be up to 2% of your outstanding balance.

How to Avoid Personal Loan Fees

Some, though not all, personal loan lenders charge fees on their loans. Lender fees can vary greatly, so shop around for a lender that charges low or no fees. If you're not sure what the fees are, look at the loan's APR, which will include all the loan's fees as well as its interest rate. If you can't avoid origination or other fees, be sure to avoid any future late payment fees by signing up for automatic payments.

What Are the Consequences of Late Payments on a Personal Loan?

Since payment history carries the most weight when calculating your credit score—accounting for roughly 35% of your FICO® Score —a payment 30 days or more late can have a significant effect on your credit. Here are consequences of making a late payment on your personal loan:

  • Your credit may be negatively impacted. Your credit score gives lenders an idea of how likely (or unlikely) you will be to repay your debts. Late payments can negatively impact your score, while paying all your debts on time can positively impact your score.
  • It can be more difficult to be approved for credit. A lower credit score caused by late payments can make it challenging to qualify other types of credit and possibly even an apartment. On the flip side, good credit can open the door to many benefits, like better insurance rates and credit card offers.
  • You might pay higher interest rates. Lenders consider it less risky to lend to borrowers with good credit than to those with poor credit. For that reason, people with high credit scores and a favorable credit history typically receive the lowest interest rates and best terms.
  • You might be charged a late fee. If you miss a payment on a loan, you might be charged a late fee.

The Bottom Line

Although personal loans generally have no penalty APRs, it is possible to run up late fees and other charges if you miss a payment or make late payments on your loan. Doing so can hurt your credit and make it more difficult to qualify for another personal loan or other credit products in the future. Checking your credit score and credit report regularly, which you can do for free through Experian, allows you to monitor your progress and keep an eye on your loan and other debt accounts.

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To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through December 31, 2022 at AnnualCreditReport.