The simple guide to loan fees

By Richard Whitten, senior writer at Finder

Personal loans and car loans often come with a few fees. Sometimes these fees are a basic upfront charge, but they might be monthly charges, or fees that only apply if you miss a repayment or pay off the loan early. Loan fees can even be charged as a percentage of your loan amount.

It can be hard to work out exactly how much a loan’s fees will cost you. But factoring in the cost of fees is essential if you want to understand how much the loan will cost in the long run.

Let’s take a look at the most common fees you’ll find on many types of personal loans, car loans and more.

Application or establishment fees

A lot of loans come with either an application or establishment fee. You pay this fee upfront and it covers the cost of processing your application. Some lenders charge a flat fee while others charge a percentage of your loan amount.

Even with a flat application fee, this can vary depending on the loan amount, with higher fees when you borrow above a certain threshold.

With a percentage amount, a lender may charge 1.5% of your loan amount as an application fee. Here’s a simple example:

• Application fee: 1.5%

• Your loan amount: $2,000

• Your application fee is 1.5% of $2,000, or $30

Service or monthly fees

Lenders often charge a monthly fee of some kind as long as you have the loan. This fee is smaller than an establishment or application fee, but you have to pay it regularly rather than just once.

Monthly fees can also vary depending on your loan amount. When comparing personal loans it’s very important to look at any ongoing fees and try to calculate how much they’ll cost you over the life of the loan.

For example, if you take out a loan for 6 months and there’s a $15 monthly fee, you’re actually going to pay $90 all up.

Some lenders may call this fee a service or even an annual fee. An annual fee will be charged once a year instead of monthly, and is therefore usually bigger than a monthly fee.

Late payment fees

This one is pretty self-explanatory. If you miss a scheduled loan repayment then the lender adds a fee on top. This is to discourage borrowers from missing payments. Not every lender charges late payment fees.

Early repayment fees

Getting out of debt faster saves a borrower money, but it means less profit for the lender. For this reason, lenders may charge you a fee for paying off your loan early.

It can be hard to estimate early repayment fees. When looking at a loan, first check if the loan has this fee at all. And if so, check how large the fee is.

Exit fees

Exit fees only apply to fixed rate loans when the borrower ends the loan early. Lenders fund their fixed rate loans for a set amount of time, and can make less profit if you break the loan early.

The size of your exit or break fee is impossible to calculate before you get a loan. The cost depends on how much you’ve borrowed and how long is remaining on the fixed rate term. The more you borrow and the earlier you exit, the higher the fee.

If you want to be flexible about when exactly you repay the loan in full, you should consider a variable rate loan. These loans usually don’t have exit fees.

Document preparation fees

A document preparation fee covers the cost of collecting and processing various documents associated with your loan application. This includes identification documents and your credit report.

This fee type is less common these days with so many applications being processed online.

By Richard Whitten, senior writer at Finder