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Personal loans are a great way for people to acquire money they would not have been able to otherwise. Loans help people get the things they need now and pay for them later. For those not fully aware of how personal loans work, it is simply a borrowing method that gives people a desired amount of money with the expectation that the amount will be paid back along with interest at a later date.
Regardless of how much money is associated with each personal loan, various fees are often times attached to each loan. These fees, however, come in many different shapes and sizes and are sometimes harder to notice at the time of acceptance of a personal loan. With that being said, steps can be taken to become aware of multiple fees associated with personal loans as well as how to avoid some of them. First, we are going to go over what kind of hidden fees you might find meshed between the terms and conditions of your loan as well as how much they cost and then we will look at ways to dodge them in your personal loan quest. Check out different kinds of fees you might expect when you take out a personal loan below.
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Late fees are the most common types of fees to expect with any personal loan. As stated before, personal loans require payment be made in a set amount of time. If the payment is not met by this set date, there are financial consequences that range from paying an established predetermined fee to paying a penalty in form of a percentage of your balance. There are not many ways around this fee since failure to meet a loan payment date is intolerable by the majority of lenders.
The amount of a late fee on a personal loan depends mainly on the lender you decide to go with. Some companies charge a late fee equal to 4 or 5 percent of the monthly payment, while others might charge a flat rate between $20-$50 for every late payment.
An exit fee is another fee that is set in place by many lenders. In order to pay off your loan earlier than expected, you must pay a penalty to the lender. It might seem uncanny to be punished for wanting to give back money earlier, but it is intended to cover the interest your lender would have collected over the agreed upon lifespan of your loan. The prepayment fee guarantees the full cost of your loan, no matter when you decide to pay it.
Prepayment fees can be steep – sometimes hundreds or thousands depending how much interest was left to accrue on the life of your loan after paying it off. You can calculate a prepayment penalty by adding all the interest you would have had to pay on your loan by the end of its lifespan. Prepayment fees can also come in the shape of a flat rate which will have to be specified by your lender.
Another type of prepayment fee used by lenders is commonly referred to as the “sliding scale” fee. In summary, this fee implies that the earlier you pay your loan off, the higher the penalty will be.
This one is best explained with an example. Let’s suppose you met with a lender and set up a five-year loan plan in which you were to pay back $50,000 plus 4% interest. If you pay back the loan in the five years as expected, you will pay only 4% interest. However, things change and instead of paying back the loan in full in 5 years, you are ready to pay it back in 2 years. Because of this act, you may be required to pay an interest rate of 8% on the amount of the loan rather than 4%. Your interest rate increases the earlier you try to pay back the loan.
This fee is also known as a disbursement or establishment fee and varies greatly from lender to lender as well as from borrower to borrower. You might have a different origination fee than someone borrowing at the same company with the same loan amount. Before we get into how much an origination fee might cost you, let’s understand what an origination fee is. In summary, an origination fee is the amount of money that must be paid in order to have the banks consider you a personal loaner as well as cover the costs of processing your loan. Before an origination fee is processed, banks have to look through your financial history or credit history to determine whether or not you would make a good candidate for the loan in the first place. If the lender notices you do not have a good credit history, you will be considered a riskier borrower and will likely pay a higher origination fee. While this fee may seem ridiculous to many, it is how lenders can be certain they are loaning money with as little risk as possible. If you want to reduce this fee or eliminate it entirely, try working on improving your credit while in the United States.
An origination fee can either be paid into the monthly cost of your loan or simply taken out of the amount you’re funded. Depending on your credit, among other factors like who your lender is, the fee will usually come out as a percentage of your loan amount ranging up to 8%. Most lenders charge 5% origination fee but Stilt charges a lot lower fees compared to other lenders.
Finally, while some may not consider this to be a “fee,” it is important to understand what your lender’s Annual Percentage Rate (APR) is. In short, this term refers to the amount of money you are expected to pay for borrowing a certain quantity of money. This is probably the most important factor/fee to consider when picking a lender as it ultimately determines how much additional money you are expected to pay back after creating a personal loan with your lender.
With so many fees already mentioned, it is important to note that there are still many others out there that you must be diligent in searching for, which might make taking out a personal loan seem intimidating. While it is crucial to choose the right lender for you and your needs, there are some steps you can take to make the right decision.
Remember that hidden fees tend to pop-up no matter how much that commercial you saw said you wouldn’t find any surprises. The best thing you can do to protect yourself from various fees is to meet with multiple lenders before deciding to take out a loan. Some will offer more pros and more cons when compared to each other, which is why the right lender for you depends on your specific financial situation.
You want to make sure the representative you meet up with is as transparent as possible in explaining all the terms and conditions as well as the fees involved in acquiring the loan. As long as you are informed, there is no reason to shy away from taking out a personal loan, as they are a great tool used by many to manage their finances successfully. Good luck on dodging those loans and finding the best loan for you!