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Personal loans are a useful source of financing for many borrowers. Interest rates tend to be well below what you’d pay using a credit card. They’re usually unsecured, unlike mortgage loans that put your property on the line. And you can use personal loans for nearly anything you want.
However, personal loans can come with unexpected fees. And some lenders charge more than others. This guide explains some of the common fees to watch out for when applying for a personal loan and comparing lenders.
In this guide:
- 5 Common personal loan fees
- 2 things to know when comparing loan fees
- Lenders that don’t charge any fees
5 Common personal loan fees
Loan origination fees
Loan origination fees are likely the most common type of fee. You’ll pay this fee upfront when you borrow.
What is an origination fee?
A loan origination fee is charged when you first take out a loan. Its purpose is to cover the costs that lenders face to underwrite and process the loan.
An origination fee is usually charged as a percentage of the loan amount. They can vary from around 1% of the borrowed amount to 10%, depending upon the lender. The fee is usually subtracted from the loan: If you borrow $10,000 and pay a 1% origination fee, you’ll receive $9,900 in funds.
Loan application fees
Application fees are also paid upfront but are much rarer than origination fees. Lenders charge them to cover the costs of processing an application submitted for a loan, and they vary by lender, loan type, and amount borrowed.
If a lender you’re considering charges an application fee, you can easily find an alternative that doesn’t.
Late payment fees
Late payment penalties aren’t charged when you obtain a loan, but rather if you make a monthly payment after it’s due. These fees are intended to deter late payments and cover any costs a lender incurs to collect the payment.
Some lenders charge a flat rate while others charge a fee equal to a percentage of the late payment. Flat rates on loans we’ve reviewed tend to be between $10 and $40, but could be as high as a $100. A percentage-based fee is usually 5%.
Prepayment penalties are sometimes charged if you want to pay off a personal loan ahead of schedule. Not all lenders charge them, but those that do aim to recoup some of the interest they expected to obtain throughout the life of the loan.
A prepayment penalty is generally based on how long you have had your loan and your outstanding loan balance. If you have just a short time left in the repayment term, your prepayment penalty will be smaller.
While not common, some lenders charge annual fees during the time you have a loan. These are intended to cover costs associated with servicing a loan, such as collecting and processing payments. Personal loan annual fees are usually less than $100.
2 things to know when comparing loan fees
Keep these things in mind when comparing loan fees to make sure you get the best deal when you borrow.
Compare APRs, not interest rates
An APR, or annual percentage rate, looks at the total cost of borrowing each year. This includes not just the interest rate you’re charged, but also fees on the loan.
If one lender charges an origination fee and another has a lower interest rate, for example, compare APRs to see how the combined fees and interest rates affect the long-term cost of each loan option.
The table below shows two hypothetical $5,000 loans with the same five-year repayment term to show how a loan charging a fee could be similar to one that doesn’t over the long-term.
|Loan #1||Loan #2|
Know how the fee is paid
In many cases you don’t pay loan fees directly. Instead, the fees come out of the funds you borrow. This means you’ll actually receive less cash in hand than you’re borrowing on paper.
This is good news because it means you don’t take on additional debt. But unfortunately, it also means you get less money to use when you borrow. For that reason, take fees into account when determining the loan amount you need.
Lenders that don’t charge any fees
While personal loan fees are common, many of the best personal loan lenders do not charge any fees.
For example, two of our top lenders, LightStream and SoFi, offer fee-free loans with competitive rates. You can compare them below, and you can learn more in our LightStream vs. SoFi comparison and our guide to the best no-fee personal loan lenders.
Author: Christy Rakoczy