A loan fee is any cost associated with taking out a loan, other than the interest rate. Cash advance loans, personal loans, and many others will have specific loan fees. While most borrowers only look at the interest rate when considering a loan, there can be additional fees that you should be aware of.
What Types of Loan Fees Can I Face?
Financial institutions make money by charging interest on the money they lend. In addition to this interest, any other fees associated with the loan are considered “loan fees.”
Common loan fee examples include application fees, origination fees, processing fees, funding fees, late fees, overdraft fees, NSF fees, prepayment fees, annual fees, and closing fees. Keep in mind that different loans have different fees, and you won’t always pay all these fees for every loan that you take out.
The best way to compare the costs of different loans is to look at the annual percentage rate, or APR. The APR will show you all the costs associated with borrowing, so be sure to always check this out as opposed to looking at a more simple interest rate.
What Are Application and Origination Fees?
Application fees are the costs a borrower pays when applying for a loan. It takes time and resources for a lender to review every loan application, so, in some instances, the borrower covers the application costs.
An application fee widely depends on the loan type, borrowed amount, and the financial institution that receives the application. In most cases, these fees aren’t refundable, even if the borrower’s application is not approved.
Some lenders charge an origination fee, which typically means a percentage of the loan is added to your balance as a flat fee. Even if you pay an application fee, you might also face an origination fee upon approval.
Origination fees are often associated with mortgages, and are either fixed or based on a certain percentage of the borrowed amount.
What Are Processing Fees?
Loan applications have associated processing fees which some lenders charge. These include document processing, credit checks, and employment verification.
What Are Funding Fees?
The US Department of Veterans Affairs guarantees mortgage loans for veterans. These loans have fewer costs associated with them, but there is typically a funding fee that veterans pay when getting this loan.
Funding fees depend on the veteran’s type of service and the loan amount. If a veteran has a disability related to their service, they might be exempt from funding fees.
What Are Late Fees?
A late fee is a penalty charged every time you miss a payment on your loan or credit card. Besides having to pay more, late payments may also negatively affect your credit score.
What Are Overdraft Fees?
When you want to withdraw more money than you have in your account, a bank usually allows the withdrawal, but charges an overdraft fee. These fees vary from bank to bank, but they can add up quickly and are often charged daily.
NSF stands for “non-sufficient funds,” and may be charged when you write a check from your account but don’t have enough funds available to cover the check. If you don’t have enough funds to cover the check, you will be charged with an NSF fee for the denied payment.
Depending on the recipient’s bank, the party attempting to cash the check may also be charged with a fee for non-sufficient funds.
What Are Prepayment Fees?
Some lenders charge a fee when a person pays off their loan early. By charging this prepayment fee, a lender is guaranteeing a certain level of ROI.
What Are Annual Fees?
An annual fee is any fee paid yearly to a financial institution to cover the costs associated with offering credit products. Annual fees are typically billed in twelve equal monthly payments, or once per year.
What Are Closing Fees?
Closing fees are associated with many real estate transactions and are paid by both the buyer and the seller. It is important to do your research and understand any potential closing fees involved in your transaction.
The Bottom Line
Every loan has several costs associated with it, and the best way to find out exactly how much you will pay is to look at a loan’s APR. The APR includes all costs associated with borrowing and is the best way to compare loans.