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Lenders sometimes charge fees to cover the costs of reviewing, underwriting and servicing personal loans. Fee types and amounts vary by financial institution, and the more fees a lender attaches to a loan, the higher the total cost.
While you may not be able to eliminate all loan fees, you can reduce the amount you have to pay. Here's a look at some of the costs you may encounter when applying for a personal loan, ways to minimize them, factors to consider before getting a loan and personal loan alternatives to consider.
5 Common Personal Loan Fees
Interest
Interest is a fee your financial institution charges in exchange for allowing you to borrow money, and nearly all lenders charge it. When you make your payment each month, the lender applies a portion of it to the principal balance and a portion to interest charges. The higher the interest rate, the more you have to pay. People with high credit scores typically qualify for lower rates than those with poor scores.
Application Fee
Application fees are a flat charge that covers the upfront costs lenders incur to process your loan application. They may not be refundable even if the lender doesn't approve you for a loan. Application fees for personal loans are uncommon, so some research could help you find a loan without an application fee.
Origination Fee
Unlike an application fee, which is generally a flat amount, origination fees are usually a percentage of the amount you borrow. Origination fees cover the cost to process and underwrite the loan, and the lender usually deducts the fee from the loan amount at the time of funding. Origination fees vary by lender and may range from 1% to 10% of the loan amount.
Late Fee
Lenders commonly charge late fees if you don't make your payment by the due date each month. Late fees can be a flat charge or a percentage of the amount you owe and vary by lender. While no one wants to pay more than they have to, paying your bill late poses additional risk beyond the extra fee.
If you pay your bill more than 30 days late, your lender will likely report it to one or more of the three consumer credit bureaus (Experian, TransUnion and Equifax), which can negatively affect your credit. Debt payment history is the most important factor in calculating credit scores. While the impact on your scores decreases over time, late payments stay on your credit reports for seven years.
Insufficient Funds and Overdraft Fees
If you try to make a payment and don't have enough money in your account to cover what you owe, your financial institution may charge an insufficient funds or overdraft fee. Insufficient funds (NSF) fees occur when your bank or credit union declines the transaction because you don't have enough money in your account, and overdraft fees occur when the financial institution covers the transaction anyway. These fees can add up quickly. If you overdraw your account, it's crucial to take steps to resolve the situation right away to minimize the financial impact.
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What Else to Consider Before Getting a Personal Loan
Before taking out a personal loan, it's important to understand whether you can afford another monthly payment, how it will fit into your budget and how it will affect your ability to save. Before applying for a personal loan, here are some questions to ask yourself.
- What do I need the money for? You may want to think twice if you're considering a personal loan for a discretionary expense. It's generally best to save up and pay cash for items that aren't essential.
- How much do I need? Most lenders have minimum and maximum loan amounts. If you need more or less than that, a personal loan may not be your best bet.
- Can I afford the payments? Personal installment loans require borrowers to make payments every month throughout the loan term. Determine whether you have room in your budget for payments that may last years.
- How long will it affect my ability to save for other financial goals? Taking on a personal loan payment each month will reduce the amount you can save and invest—possibly for years.
- What rate am I eligible for? While you may qualify for a personal loan with less-than-stellar credit, you need excellent credit to snag the lowest interest rates. High rates make personal loan payments less affordable.
- What are my other options? A personal loan isn't the only way to get the extra cash you need. Consider alternative ways of covering expenses, such as getting a side gig, using a paycheck advance app or borrowing money from a friend or family member.
Learn more >> Pros and Cons of Personal Loans
How Can You Reduce Your Total Loan Cost?
Here are some tips to help you reduce your total loan cost.
- Improve your credit. People with higher credit scores could qualify for lower interest rates.
- Set up autopay. Some lenders give borrowers a break on interest charges when they make their monthly payments using autopay. Paying this way also helps avoid late fees because your payments will be on time. If you set up autopay, make sure you have enough money in your account to cover your bill when it's due.
- Shop around and compare offers. Not all lenders charge the same fees. The best way to minimize or avoid fees is by shopping around and comparing offers from multiple lenders.
- Only borrow what you need. Keeping loan amounts to a minimum reduces the interest you pay, reduces your overall payment amount and lowers the origination fee if your lender charges one.
How to Qualify for a Personal Loan
When applying for a personal loan, you must meet the financial institution's lending criteria, which typically include:
- Credit scores: People with high credit scores may be more likely to qualify for a personal loan and get a lower interest rate than those with low credit scores.
- Income: You must demonstrate that you have the ability to repay what you borrow.
- Debt: Lenders review the amount of debt you have compared to the amount you earn, known as your debt-to-income ratio, to ensure that taking on more debt won't stretch your budget too thin.
Learn more >> How to Get a Personal Loan in 7 Steps
Alternatives to Personal Loans
While a personal loan can provide cash for almost anything, it may not always be the right option. If you need extra cash, here are a few alternatives to consider.
- Credit card: Credit cards offer a convenient way to purchase items you need. If you have good credit, you may even qualify for a 0% introductory annual percentage rate (APR) credit card. This will save you the most on interest payments, provided you pay your balance in full by the end of the introductory term.
- Home equity loan: A home equity loan may be a good option if you need a larger sum of money. These loans typically have lower interest rates because your home secures them. However, the biggest downside is that you put your home at risk if you're unable to make your payments.
- Buy now, pay later (BNPL) plans: BNPL plans allow you to pay for purchases over time, interest-free. They also often don't require credit checks, making them easier to qualify for. However, they are usually only available on the purchase of goods, so a BNPL won't be an option if you're hoping to use the funds to consolidate debt, for example.
- Paycheck advance apps: Paycheck advance apps let you borrow small amounts of money using your next paycheck as collateral.
- Borrowing from friends or family: If you have friends or family members you trust, consider asking if they'll lend you the cash you need. Just be sure you have a good relationship with the person and a clear repayment plan so you don't put your relationship at risk.
The Bottom Line
Interest and fees add to the total cost of your loan. While you may not be able to avoid all fees, you can minimize the ones that are often attached to a personal loan by making your payments on time, shopping around and comparing offers from multiple lenders. Having a healthy credit score can help you qualify for a personal loan with a lower interest rate and potentially fewer fees. Check your credit report and FICO® Score☉ for free with Experian, and take steps to improve your credit before applying if necessary.