5 Hidden Costs of Personal Loans

Quick Answer

Application and origination fees can drive up the initial cost of a personal loan. Prepayment penalties, credit insurance and late fees can also make borrowing more expensive than you thought. Spending some time finding and understanding these personal loan hidden costs can save you money.

A person hands another person money while a contract sits on the table.

When you take out a personal loan, you know how much it'll cost to repay and how long repayment will take. But you might not be aware of some other costs, including loan origination fees or prepayment penalties.

While it's important to know exactly what a loan is going to cost you and how it will fit into your overall budget, it's not always easy. Once you know where surprises might lie, you're better able to choose a loan that won't come with fees you didn't expect. Here are five fees that might make a personal loan more expensive:

1. Prepayment Penalties

Prepayment penalties are fees for paying off your loan before it is due to mature. If your lender charges prepayment penalties, it can mean that paying off a loan early saves you less money than you think when all is said and done.

You can avoid prepayment penalties by shopping carefully for your personal loan. To find these fees, ask the lender directly or look at the fine print in your lending documents to see whether the loan you are considering has a prepayment penalty. Some lenders don't have them at all.

If you're considering a loan that includes a prepayment penalty, you can still see if you can get that particular term changed. You can:

  • Ask the lender to give you an estimate for a similar loan that does not have a prepayment penalty.
  • Negotiate with the lender to get rid of the prepayment penalty. Loan agreements are contracts, after all, and they can be changed if both parties consent.

2. Origination Fees

Origination fees are a percentage of the total amount borrowed. They are common with mortgages, but some personal loans base them on creditworthiness.

Some common things covered by origination fees include:

  • Preparing documents
  • Processing your application
  • Checking your credit score

3. Application Fees

These are fees you have to pay just to submit an application. Before you do that, it's a good idea to be as confident as possible that you really want the loan, are likely to qualify for it and are comfortable with the terms. That way, you won't need to pay multiple application fees.

4. Late Fees and Returned Check Fees

If you pay late, you'll probably be charged a fee. Likewise, a bounced check can result in a fee, possibly from your bank as well as from your lender. A payment more than 30 days late can also be reported to the credit bureaus, and that could make it harder to qualify for credit products in the future.

To avoid late fees, you can set up reminders for yourself on a calendar or automate your payments, assuming that the account you are using reliably has enough money in it to cover the balance.

5. Credit Insurance

This type of insurance pays your personal loan for you if a qualifying event leaves you unable to do so. It's an optional add-on, and if you purchase it, it's added to your payment amount for the life of your loan.

Finding the Fees

There's a fairly easy way to figure out how the fees add up and what the loan will actually cost you: Look at the annual percentage rate (APR). The APR reflects the total cost of your personal loan. It's the stated interest rate plus any other fees you cannot avoid, such as origination and application fees.

The APR is a more accurate way to compare loan costs than just looking at interest rates. The interest rate you're quoted is determined partly by the debt you already carry and partly by your credit score. A higher credit score may help you qualify for a lower interest rate.

However, an APR does not include fees for late payments or returned checks because those are not required of all borrowers. It also might not include credit insurance unless you are in the military.

The Bottom Line

Personal loan fees can significantly impact the cost of borrowing money. Some fees can be buried in fine print. If you are looking to avoid a specific fee, such as a prepayment penalty, ask your lender directly and check your loan documents. Knowing your APR can help you compare the overall cost of your loan options and find the best one for you.

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