How are fees charged on personal loans?

A personal loan is one of the most versatile ways of borrowing money. The funds used can be put toward a huge range of expenses, including a wedding, travel, renovations plus so much more.

Typically, the interest rate you pay will be fixed over the life of the loan, so you know how much you will need to pay each fortnight or each month. Personal loans also have many different terms, ranging from six months to ten years or more.

Your credit score will also determine the interest rate the lender is prepared to offer you. The higher your score, the lower the interest rate you will pay. You can check your credit score at ClearScore right now for free. It’s also a great place to compare different personal loans for which you can apply.

There are two main types of personal loans – secured and unsecured. With a secured loan, the borrower puts up an asset as collateral, such as a property or other investment such as a portfolio of shares. If the borrower cannot pay back the loan, the lender can use the collateral to settle the debt.

With an unsecured loan, the lender considers the borrower’s income and salary and his or her employment situation, when assessing an application. Unsecured loans usually attract a higher interest rate than a secured loan, because they are riskier than secured loans.

It’s important to understand how any fees work when you take out a personal loan. There is a range of different charges to consider.

• Origination fee: This is the fee some lenders will charge you to set up the loan. Some will charge a fixed fee, typically between $100 and $500. Other will charge a percentage fee based on the value of the loan. The percentage charged can vary from about 1% to 5% or more. It’s essential to check with your lender about whether it will charge a fee before you decide to take out a loan because it can add to your cost of borrowing. Let’s say you are taking out a $10,000 loan and your lender charges an origination fee of 2%. You will pay $200. But you may not need to pay an origination fee at all with some lenders.

• Annual fee: Some lenders may also charge an annual fee when you take out a personal loan. This may be a fixed fee, say $100 a year, or it may be a percentage of the value of the underlying loan.

• Administration fees: Most lenders will charge you a fixed fee, say $35, if you miss a payment or are late making a payment. This can also affect your credit score. So try to avoid missing a payment. If you are going to be late with a payment, contact your lender in advance and try to negotiate not to pay the admin fee as long as you make the payment by a certain date. It’s also a great idea to set up a direct debt to make your repayments, to avoid the risk of being late and incurring unnecessary additional fees.

• Break cost fees: Some lenders may also charge a fee if you make extra repayments or pay off the loan before the end of its term. Typically, this fee will depend on the time left to repay the loan, the rate the loan was fixed at and the cash rate at the time the extra repayments are made. If you want the flexibility to make extra repayments, it’s an idea to look for a loan without break fees.

As this shows, fees can add a considerable amount to the cost of the loan. Some lenders will charge a range of fees, while others won’t charge fees at all. Ensure you understand how fees and charges work before deciding to take out a personal loan.