A personal loan is one of the most-used loans in the US. Every year, millions of people apply for personal loans for various reasons. These reasons can be serious ones such as medical bills, educational expenses, or just personal goals such as going on a luxury vacation, buying a new car, etc.
According to TransUnion, an American consumer credit reporting company, Personal loan balance is one of the fastest-growing credit trends in the First Quarter of 2019. It’s reaching a new high of $143 billion, with a growth rate of 19.2%. Personal loans are continuing to grow in popularity after the FinTech revolution. FinTech loans now hold almost 38% share of all unsecured loan balances, compared to only 5% a few years back.
Personal loans vs. Credit Card
The most significant advantage of having a personal loan over a credit card is the fixed interest rate. Having a fixed loan repayment allows you to manage the monthly budget far easier than the credit card or any other loan. Credit cards come with a variable rate of interest, which can change over time, depending on too many factors. You also might be able to lend more than you can do with a credit card.
Most of the time, you can make over-payments or pay off your loan in full, at any time, without any penalty. A personal loan isn’t a good option when you need a smaller amount of money as the interest rate might increase for the lower amount.
Personal loan fees
Personal loans have predictable interest rates, easy-to-apply. However, if you are not careful enough while applying for it, you might end up paying more than the original loan. If you are not taking a considerable amount, you are already choosing a loan with a much higher rate of interest. The interest rate might fall into a range from 18% to 24%.
So what are these fees, and do you have to pay all of these?
Let’s find out.
1. Application Fee
Usually, people tend to scroll through the terms and conditions without giving an actual look at the content. Most of the loan lenders don’t require you to submit any fee to apply for the loan. Usually, these loans are available to consumers with good or excellent credit scores. One can easily qualify for a personal loan if the FICO score is over 740.
This fee covers your pre-qualified process without raising any hard inquiry on your credit report. Ideally, you should choose a lender who doesn’t charge you for the application. You may need to do some research before making any financial decision, however, these fees can be avoided.
2. Origination fees
You may not altogether avoid this fee as most of the lenders require you to submit a fee to process the loan application. This fee can vary from lender to lender or may depend on the amount you want to borrow. Usually, the companies expect you to pay a percentage of the total amount.
Origination fee can range from 1% to 8%, which is a lot at the higher end. For example, if you want to borrow a $10,000 and the lender expects you to pay 5%, then you have to pay $500 as an origination fee. Instead of paying $10,000, you will end up paying $10,500 to the lender.
The origination fee largely depends on your credit score. So, if your credit score is very good, or excellent to qualify for a loan, you don’t have to pay a higher percentage of the origination fees.
3. Arrangement Fees
These are unnecessary fees attached to the personal loan application process and will make a loan more expensive. Make sure you read all the documents and APR carefully.
APR or annual percentage rate describes your rate of interest stated as a yearly rate. An APR for a loan may include many fees. That’s why it is essential that you compare the APR of the loan instead of comparing only the interest rate. APR gives you a bigger picture of the amount you have to pay to take out a loan.
Calculating APR can be a complicated formula. But if a loan doesn’t have any arrangement fees, this would be minimal as you can put zero in the fee variable.
A few lenders might try to sell you an insurance policy that covers your loan repayments as a personal loan is not a secured loan. Insurances are widely mis-sold, and many of these policies aren’t good enough or don’t pay out all in the case of illness or job loss.
4. Prepayment Fees
These fees are based on the factor of early payoff. You should always look for a personal loan without any early payoff penalties. There shouldn’t be any penalty for paying off your debt and living a life debt-free. Right?
No matter how good the interest rate the lender is offering, or what the reviews state about this lender. If a personal loan lender charges you for getting rid of your loan by paying it earlier, you need to stay away from such a lender.
5. Late instalment Fees
I know we should pay our debt within the payment due date – but things can happen. You might skip the due date or even the grace period they offered you. These fees are typically not much, but if you are continually paying your bill late, consider calculating the total amount.
You can avoid this fee by paying on time. You can mark the due date in Google calendar, or set up alerts on your smartphone. There are plenty of personal finance apps that will remind you of the due date. Keeping everything in front and planning monthly payments early or on time each month can save you a lot.
Some lenders even offer incentives or discounts if you set the loan repayments to be paid automatically from your account or credit card so that you could save the money.
There could be other management fees, such as check returning fees. The lender would charge you if your check got returned for having insufficient balance in the bank account. Although you should always be sure about the amount with you, your best bet is to pay instalment payment via auto-update or direct wire transfer. This ensures a safe and quick payment.
Now that you know about different fees related to personal loans, the next step is probably to do some research and compare lenders based on the APR and other factors such as rate of interest, holding time for the loan, processing and management fees, etc.