When you apply for a loan, what’s the first thing that comes to mind? Who’s the best lender? How much can I borrow? Where can I get the lowest APR?
These are all important questions.
And while it’s always an effective strategy to keep your interest costs at a minimum, loan fees can turn a great looking loan into something that’s – well – quite average. To uncover these hidden details, look at a lender’s frequently asked questions page (FAQ). There you’ll find a wealth of information regarding APRs, loan origination fees, late payment fees and prepayment fees.
But if you don’t have time, don’t sweat it. We’ve got your covered.
In this guide, we’ll break down the most common loan fees you’ll encounter during your application and let you know how they compare across lenders.
Annual Percentage Rates (APRs)
Before we get into the most common fees, first, we want to explain how APRs work. Although it’s a term you see nearly everywhere – from personal loans to mortgages to credit cards – most borrowers don’t understand what APRs are or how they’re calculated.
To define the term, APR is an acronym for Annual Percentage Rate (APR).
And that means…?
Well, in a nutshell, it means the annual interest rate you’re charged on your loan – including all applicable fees. For example, unsecured personal loans have APRs that range from 5.99% to 35.99%, while alternative loans have APRs that range from 35.99% to 400%. And while we hope you haven’t experienced it firsthand, predatory payday loans have APRs of 400% or more.
To calculate the interest charge on your monthly payment, you multiply your APR by the loan balance. For example, if you take out a $1,000 loan with an 18% APR, repaid over 12 months, the interest charge on your first payment is $15. To get this figure, simply divide your 18% APR by 12 so it represents a monthly interest rate of 1.5%. Next, multiple the monthly interest by your remaining balance each month. But remember, because personal loans are amortized – meanings you repay interest and principal at the same time – your interest payments decline over time. For example, in the second month, your interest charge is $13.85, while in the third month it’s $12.68.
Loan Origination Fees
A loan origination fee is an upfront charge you pay lenders to process your application. The purpose is to compensate lenders for providing the loan in the first place. For most lenders, origination fees range from 0% to 8%.
You may be thinking: I’m already paying you an 18% APR! And now you want to charge me another 8% on top of that! Well, before you vent your frustration, understand that loan origination fees are actually included in your APR. As well, some companies are willing to waive the fee for reliable borrowers.
But for lenders that do employ the practice, let’s break down how it works.
Say your muffler is making that annoying sound again, but payday isn’t for another week. If you take out a $1,500 personal loan to help nurse your car back to health, a 1% loan origination fee means you pay an upfront fee of $15. Conversely, an 8% loan origination fee means you pay an upfront fee of $120. As you can see, the percentage makes a big difference. Moreover, the larger the loan amount the more you’re affected. Instead of fixing your car, say you need an emergency loan to repair a leaky roof. If you take out a $10,000 loan, a 1% loan origination fee requires an upfront payment of $100 while an 8% loan origination fee requires an upfront payment of $800. When added to your APR, your rate can jump pretty significantly.
Late Payment Fees
Just when you think everything is on schedule, an emergency hits and throws your finances completely out of whack.
Whatever the issue, life happens. And it’s not easy.
If issues like these cause you to fall behind on your loan, lenders can charge a late payment fee that ranges anywhere from 5% of your monthly payment to upwards of $35 And while missing one payment won’t sink your finances, it can do severe damage to your credit score. Many lenders report repayment behavior to Equifax, Experian and TransUnion – so delinquent accounts can have terrible consequences.
So, before taking out your next loan, pay close attention to late payment fees. Discuss the issue with your lender directly so you know how your credit score and pocketbook will be affected. If you’re a well-known client and have a good reputation with company, most lenders work to find a solution that benefits all parties.
Wait, there’s more? I know what you’re thinking, but don’t worry we’re almost finished.
Technically, a prepayment fee is charged by your lender when you pay off your balance early. But luckily, most reputable lenders don’t charge any prepayment fees and actually encourage borrowers to pay off their loans as quickly as possible. That way, borrowers can rebuild their credit scores and get on the fast track to bigger loans and lower APRs in the future.
How Do Loan Fees Compare Across Reputable Lenders?
To get a sense of how APRs and loan fees compare across lenders, check out the table below:
|Online Lender:||APR:||Origination Fee:||Late Payment Fee:||Prepayment Fee:|
|PersonalLoans||5.99% – 35.99%||1% – 5%||Varies By Lender||$0|
|LendingTree||3.99% – 35.99%||0% – 3%||Varies By Lender||$0|
|Upstart||8.16% – 35.99%||0% – 8%||The Greater Of 5% Of The Amount Past Due or $15||$0|
|Upgrade||6.99% – 35.97%||1.5% – 6%||Up To $10 If The Full Payment Is Not Received Within 15 Days Of The Due Date||$0|
|Payoff||8.00% – 25.00%||0% – 5%||$0||$0|
|LendingPoint||15.49% – 34.99%||0% – 6%||$30 After The 15 Day Grace Period Ends||$0|
Because PersonalLoans and LendingPoint offer loans to borrowers with credit scores of 600 or less, they make a great option if you have bad credit. LendingTree — with over 10 billion in loans provided to date – is one of the largest short-term lenders in the marketplace today. If you have really bad credit, it’s the best option for you. LendingTree offers unsecured personal loans to borrowers with credit scores as low as 500.
While APRs help gauge your total cost of borrowing, don’t ignore pesky loan fees. While they seem minimal on the surface, over time, they can add-up – especially if you find yourself confronted with an unexpected emergency. When deciding which lender is right for you, weigh APRs and loan fees equally. Just because one lender charges a high loan origination fee, it can still have an APR that’s less than the next closest competitor. Conversely, another lender may offer a slightly lower APR, but charge an unusually high late payment fee. Whatever the breakdown, always weigh the pros and cons before deciding. That way, you’re prepared for almost any situation.