Traditionally, taking out a loan involves a stack of paperwork. When faced with a mound of papers filled with financial jargon, how many of us read all the details and the fine print? How many of us make sure we understand the financial terms used in the loan agreement and the fees we are charged?
In reality, not everyone takes the time to understand the terms and fees associated with their loan. Most people look at the bottom line and ask, ‘How much is this costing me?’ However, by not being familiar with the terminology and not reading agreements carefully, some of us end up paying fees without knowing what they are. The amount of these fees depends on several factors including the lender you choose and the state where you reside.
Due to the Dodd-Frank Act, which helps to protect consumers from predatory lending and unscrupulous financial practices, lenders must disclose terms and fees for all loans. Also, the FTC (Federal Trade Commission) states that lenders cannot include optional fees and financial products without informing the borrower.
Below are some common ‘hidden’ fees you may encounter when applying for a low-interest personal loan. This is not intended to be a comprehensive list of all fees, but merely an overview.
Loan origination fee – Charged when you take out a loan, this one-time fee is usually a percentage of the loan total. Many lenders charge 1% of the loan amount. In this case, if you borrowed $1,000, the loan origination fee would be $10. However, some lenders charge origination fees as great as 5%, meaning you’d pay $50 on a $1,000 loan. Because this fee is a percentage of the total, you pay more for larger loans. In addition, this fee is frequently rolled into the APR. As a result, a low-interest loan with a high APR could be more expensive in the long run than a loan with a slightly higher interest rate and lower fees.
Service charge – This nondescript fee covers a number of services related to your low-interest loan. Paid up front, this fee could cover anything from interacting with someone in person when applying for the loan to the lender’s administrative tasks.
Prepayment penalty – Prepaying a loan allows you to relieve yourself of debt sooner rather than later. However, some loan agreements don’t allow prepayment without penalty. If you pay off a loan early, you pay an additional percentage of the total loan amount (usually around 2%). The reason this prepayment penalty is levied is that paying off a loan early deprives the lender of interest payments.
Credit insurance – When lending money, lenders face the possibility that you will not repay the loan. Credit insurance is offered as an optional protection for you and your family. If you lose your job, become disabled or die, this fee protects you, but also the lender. For example, if you borrow $5,000 today then have a terrible car accident tomorrow and are unable to keep up with your loan payments, the credit insurance is used to pay the lender. As stated above, this fee is optional.
Failed payment fee – This fee is charged if you don’t have sufficient funds in your bank account to cover an electronic payment or a check that was written. Not only are you charged a fee for the failed payment, but you are usually charged additional interest as well on the missed payment.
Late payment fee – Your loan contract specifies when your loan payment is due each month. You may be fortunate enough to have a grace period built in, usually a few days after the due date. However, failure to make a monthly loan payment within the specified time period (due date and grace period) adds an additional fee to the cost of your loan. Like the failed payment fee, this fee can also bring an extra interest charge as well.
Collection fee – If missed payments put you behind on repaying a loan, the lender must then take extra actions to collect their money. As a result, collection fees are added to the borrower’s account to cover their cost of getting this money. Although the Fair Debt Collection Practices Act (FDCPA) states that these fees must be ‘reasonable’, the actual fee varies from state to state.
Be Prepared by Educating Yourself
When taking out a low-interest loan, being unfamiliar with these terms may leave you surprised at some point. Before taking out a loan, educate yourself and become familiar with financial terms before signing a loan agreement.
If at any point in the loan process before signing an agreement, you feel uncomfortable with the fees or are unsure of the terms being used, you can always stop the process. A reputable lender won’t pressure you to take out a loan if you are feeling unsure. Once you have signed an agreement, be sure to pay your payments on time to avoid further fees.