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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, such as SoFi, Avant and LendingClub, 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
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.
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.
A good credit score may also help you save a little money on interest payments if you can qualify for a lower interest rate. Experian Boost™† can add phone, utilities and some streaming services to your Experian credit report, potentially boosting your credit score for payments you're already making.