A personal loan can be an excellent tool to help you consolidate debt, cover a financial emergency, pay for a large expense, and more. Unfortunately, many lenders charge fees on their personal loans that either reduce the amount you’ll receive or increase your principal, costing you more money over time.
Luckily, it’s possible to avoid these fees if you know what to look for. In this guide, we’ll discuss some of the most common personal loan fees, which lenders charge fees, and how to avoid fees on personal loans.
What Are Personal Loan Fees?
Even the best personal loan lenders charge fees on personal loans to originate or manage the loan. The exact fees you’ll be subject to depend on your lender. Before you apply and get approved for a personal loan, learn more about the fees that come with them.
Origination fee
An origination fee is among the most common personal loan fees. Lenders charge this fee to cover the administrative cost of originating the loan. These loans are often charged as a percentage of the loan amount. For example, if you borrow $10,000 and your lender charges a 1% origination fee, then you would have to pay $100.
Your origination fee will often be added to the principal of the loan and will accrue interest, just like the rest of the loan. So for a $100 fee on a $10,000 loan, your account would show a starting balance of $10,100.
Application fee
An application fee is one that some lenders charge simply to apply for a loan. Unfortunately, you’ll have to pay this fee regardless of whether you’re approved for the loan. If you end up having to apply with several different lenders, you could end up paying several application fees.
Because this fee applies when you apply for the loan, you’ll usually have to pay for it upfront, meaning it won’t be added to your loan balance. The good news is that it’s usually quite small, ranging from $25 to $50.
Rest assured that application fees are relatively uncommon, especially with popular online lenders. As a result, it won’t be difficult to avoid one.
Late payment fee
The late payment fee is probably the most common of personal loan fees, and most lenders you come across will charge one. This fee is charged when you fail to make your monthly payment or make your payment after the due date.
These late fees are there to protect your lender. If you’re at risk of paying a fee for late payment, you may be more likely to pay your bill on time. Depending on your lender, the late payment fee may either be a flat amount or a percentage of the payment amount.
Prepayment penalty
Many borrowers try to save money on interest by paying off their loans early. Unfortunately, some lenders discourage that by charging prepayment penalties. This penalty applies when you pay off your loan balance before you were scheduled to.
The purpose of a prepayment penalty is to help lenders make money on your loan no matter what. A big way that lenders make money is through the interest charged on loans. If you pay off your loan early — and, therefore, pay less interest — your lender makes less money. This prepayment penalty helps them to hedge that risk.
Prepayment penalties were once more common in lending, especially for mortgages. Luckily, they aren’t common in personal loans and it’s easy to find a lender that doesn’t charge one.
Annual fee
Just like some credit cards charge an annual fee to keep your account open, some personal loan lenders do the same. These fees are usually relatively small and are unlikely to exceed $100. They help to pay for the ongoing administrative costs associated with servicing your loan.
An annual fee is one of the less common personal loan fees you’re likely to run into. Most popular online lenders don’t charge this fee.
Skipped payment fee
We’ve already talked about how missing a payment on your personal loan is likely to result in a fee. But some lenders also allow you to intentionally skip a payment for a small fee. Some lenders make these skip-a-payment offers during a certain time of year, such as the holidays.
Since there’s a fee to skip a payment, you might be wondering how it’s different from simply missing a payment. Yes, you’ll be subject to a fee in both cases (and it may not be any lower to skip the payment than it was if you missed it). But because you’ve skipped the payment with the permission of your lender, they won’t report it as a delinquent debt to the credit bureaus and it won’t harm your credit score.
Returned check fee
A returned check fee — also known as an insufficient funds fee — applies when you don’t have enough money in your bank account to make your loan payment. Your lender attempts to withdraw your payment or cash your check, and the money isn’t there.
As a result, your lender can’t get their money payment. And unfortunately, this fee is often accompanied by a late payment fee, since it prevents you from making your payment on time.
Why Are Personal Loan Fees Charged?
When it comes to the question of why personal loan lenders charge fees, the short answer is: to make money.
Some fees, including the origination fee, application fee, and annual fee, exist to help lenders cover the administrative costs associated with originating and servicing loans.
Other fees, such as late fees, prepayment penalties, and returned check fees, help lenders to reduce their risk. In the case of late fees and return check fees, they help reduce the lender’s risk of not getting the money they were promised. And prepayment penalties reduce a lender’s risk of not making as much interest as they expected.
How Can I Avoid Personal Loan Fees?
You’ll be happy to know that it’s relatively easy to avoid paying some of these personal loan fees, and you may be able to avoid fees altogether.
The key to minimizing or avoiding personal loan fees is research. As more online lenders enter the market, it’s becoming increasingly common for many to market themselves as no-fee lenders. Many waive application fees and prepayment fees. But it’s also becoming common for lenders to get rid of origination fees and even late payment fees.
The easiest way to check for personal loan fees is on a lender’s website. Each lender will include terms and conditions on its website that will disclose exactly which fees you might be subject to. Some make that information more easily accessible than others. Those lenders that don’t charge fees at all are likely to share as much on their website’s homepage.
Fees Charged By Some Lenders
To help make your personal loan search earlier, we’ve rounded up some of the most popular lenders along with the fees they charge in the table below.
Personal Loan Fees
How to Compare Personal Loans
If you’re in the market for a personal loan, take the time to compare offers from different lenders before making your decision. As you can see above, most online lenders don’t charge an application fee. However, many charge origination fees, late fees, and returned check fees.
First, as you’re comparing different lenders, compare the fee amounts. Many lenders charge origination fees, but the amounts can vary drastically. Some lenders, for example, will charge higher fees on personal loans for borrowers with bad credit. There’s a big difference between a 1% origination fee and a 10% fee, especially on a large loan.
The next thing to consider is how the fee is applied. In some cases, lenders simply add your origination fee to your loan amount, meaning your principal balance will include your borrowed funds plus your fee. But other lenders take the fee out of your principal amount. So if you borrow $5,000 and have a $50 fee, you’ll actually receive $4,950.
Finally, as you’re researching personal loans without fees, remember these aren’t the only ways that lenders make money. Another important cost of personal loans is the interest, which can often be high on personal loans, depending on your credit score.
Yes, it’s great to avoid paying fees. However, be sure to look at the full financial picture. If a lender charges an origination or late payment fee but offers a much better interest rate, it still may be more cost-effective in the long run.
From the Experts
AmONE asked several experts about personal loan fees and how you can minimize them. Learn how to negotiate loan fees and find the best deal.
William T. Chittenden, Ph.D., chief academic officer
Southwestern Graduate School of Banking at SMU Cox School of Business
Leo Chan, associate professor of finance
Utah Valley University
Linda M. Hooks, professor of economics and head of the Economics Department
Washington and Lee University
What types of personal loan fees are most common?
Leo Chan: There are many different types of fees for personal loans, just like a mortgage. Common fees include application fees (typically a flat fee) and origination fees (typically a certain percentage). These fees are on top of the interest the banks will charge.
William T. Chittenden: Besides interest, a common fee for personal loans is an origination or administrative fee. This is typically a percentage of the loan that is deducted from the loan amount. A 5% origination fee on a $10,000 loan would result in a $500 origination fee and the customer receiving only $9,500 but paying interest on $10,000. Origination fees can greatly increase the effective annual percentage rate on a personal loan. In this example, if the quoted APR was 10.00% on a 36-month loan, the effective APR would actually be 13.56%.
Other common fees are application fees, late fees, and prepayment penalties. Application fees are typically a flat fee ($25 to $50) charged just to apply for the loan. Late fees are charged when payments are made after the due date. Some firms allow a grace period of 10 to 15 days before a late fee is charged, while others charge the late fee if the payment is even one day late. With prepayment penalties, the borrower is charged if the loan is paid off early.
How can consumers avoid personal loan fees?
Leo Chan: Some lenders will waive certain fees. Application fees and origination fees are often waived. However, banks that don’t charge fees might simply roll those fees into the interest rate they charge you. So one way or the other, you will have to pay some fees—and they can be pretty stiff if you have less than perfect credit.
William T. Chittenden: The best way to avoid personal loan fees is to shop around. Consumers should check with a local bank or credit union on rates and fees. Having a good credit score—700 or higher—will allow an applicant to qualify for better rates. Unfortunately, those with lower credit scores may have to pay higher rates and fees.
Can consumers negotiate fees on personal loans? If so, what strategies can they use to get the best deals?
Linda M. Hooks: Consumers can use several strategies to get the best deals. First, loan conditions are connected to credit ratings, so it is important to keep your credit rating good. Simple strategies for this include paying each bill on time and paying more than the minimum amount required on credit cards. Secondly, you might find a better deal on a personal loan if you have some collateral to provide, such as a savings account or certificate of deposit. If you have time to build up some savings before you apply for a personal loan, it could work to your benefit. Finally, you are more likely to be able to negotiate or secure a better deal with a lender who knows you through other financial services they provide to you or who might expect to do additional business with you. Packaging several financial services together from one lender is worth investigating.
How can consumers find a no-fee lender for a personal loan?
Leo Chan: Banks typically will advertise their no-fee loans, so it is not hard to find. But you will likely have to pay a higher interest rate on the loan if you want no fees associated with it.
Frequently Asked Questions
Do personal loans have fees?
Yes, many personal loans do come with fees. However, there are some lenders that waive some or all fees.
What fees come with a personal loan?
There are a variety of fees that could come with a personal loan, but the most common are origination fees, late fees, and returned check fees.
Should you pay an upfront fee for a loan?
It’s uncommon for lenders to charge upfront application fees. However, many lenders charge origination fees. In some cases, your lender may deduct this fee when they pay out your loan.
Are personal loan fees negotiable?
Depending on your lender, you may be able to negotiate your fees. However, it may be more likely with a local lender like a credit union than with a large or online bank.
