Loans are the most helpful financial tools in the world. There are not many things that people can do without a loan as they allow you to borrow money for essential things of life. Loans can be secured or unsecured depending on the terms of the agreement and what you plan to do with the money when you get it. Just because these financial products are easy to get doesn’t mean lenders don’t have fees attached though, and these fees vary between different types of lenders, products, etc.
Financial freedom is essential and that makes these financial tools so helpful, but sometimes the fees attached to them add up to be more than you expected. However, getting to know these fees can help you to avoid paying too much money.
Loans are one of the only ways we can get financial freedom, but this is all forgotten when we face debt. Banks and lenders charge fees on loan applications, consumers also pay fees for any products that they use to pay off debts such as credit cards and mortgages. You should know what these fees are because it’s possible that you will have to face them when you apply for this financial product. There are fees for recurring payments which can include late payment charges, overdraft charges, etc. There are also fees for prepaying debts such as application fee, processing fee, and annual percentage rate (APR).
In the following article, we will look at the most common loan fees and will try to help you understand them better.
Types Of Loan Fees
Origination Fee
This is easily one of the most common fees in existence and is probably the easiest to comprehend as well. Origination fee is a cost that lenders charge for processing your loan application. It’s also sometimes referred to as a loan discount and it’s basically an upfront cash payment that’s waived off after closing a deal or added into your final rate. In simple words, it is the amount that will be collected from you when you borrow money. This fee can differ for different products and different types of financial tools, but generally, it costs around 2.75% of the total amount lent by banks and lenders.
Annual Percentage Rates (APRs)
APRs are charged based on your credit. It is the fee that you pay for each $1,000 borrowed. The average APR for most products is around 17%. These rates may vary from lender to lender, as well as by loan type. If you miss payments, the interest that you pay will be multiplied by the number of periods you have missed. Most lenders charge an initial fee and then add an APR to it.
Application Fees
Application fees are a type of fee that is charged by lenders based on the application. These fees can be charged for different types of financial products and they may vary between $0 and $100 depending on how important it is. These application fees can help you to get approved for a loan much easier, but be sure to ask how much of an application fee you will have to pay before signing up for one.
Prepayment Penalties
For most lenders, prepayment penalties are not offered as they are not worth it. It is not common that you should pay prepayment penalties during your payment term unless you want to give back your interest rate that has been used to calculate your payments. However, some lenders will charge prepayment penalties if you want to close your account before the payment term is finished. But some institutions such as Canadian Cash Solutions do not charge any amount for paying the amount before the deadline.
Overdraft Fees
Overdrafts are calculated by subtracting your checking account balance from the amount of your available credit line in your checking account. If there is an insufficient amount of money left in your checking account, you could get charged a fee. For example, if you have a $1,000 available credit line but $500 is drawn out of your bank account during this period, there is not enough money to cover that amount but you still need to pay for it. You can sign up for overdraft protection so that lenders don’t charge you any overdraft fees on your debit card if there is not enough money in your account to cover the purchase.
Referral Fees
Lenders may charge a referral fee if you want to borrow money from them. They would pay the fee to the person that referred you into their office. The amount of the referral fee can vary between $5 and $10, but it is important to ask for this before signing up for a loan. Here are a few things that you should keep in mind when it comes to loan fees. If you apply for a business loan through a lending platform or website, the referral fee could get you approved faster. If you are the one that is referring someone else into a lender’s office, make sure that they will not charge you any fees.
Packaging Fees
Packaging fees are generally paid by you once you receive your amount. These fees can be paid by taking advantage of the services offered by some lenders. They can help you to get a better option by providing additional benefits. These fees can be used to pay for things like account transfer costs, document preparation costs, or application costs and they are not usually too expensive.
In addition to these fees, there are some other types of charges that you may have to face when trying to get money. If you want to avoid any unnecessary charges, you should try and find out about all the fees before making any decisions. These types of fees can add up if you apply for multiple loans at once, so it is better to apply for only one option by one lender at once.
The loan fee not only depends on the lending institution that you decide to work with. It also depends on various factors such as:
- Credit score – It plays an important role and is considered by most lenders while providing different types of financial products. If you have a good or excellent credit score, you’ll be able to get a loan at favorable terms. But if you have a bad credit score, you may be charged higher fees.
- Your financial situation – You need to think about your budget before you decide to apply for a loan. If you cannot afford all the expenses at one go, then you are better off choosing a loan that requires lower monthly payments.
- Loan terms – Most financial products like loans and mortgages require different types of payments and also vary in terms and duration. The length of the loan can also affect the cost of the fees.
- Loan products and features – What are you looking to get? You’ll need to know what you want to apply for. Keep in mind that some lenders will give perks and other features such as lower interest rates if you choose to package your loan with their services.
Importance Of Levying Loan Fees
Loan fees are necessary for both the lender and the borrower. The lender will charge fees so they can make money and the borrower will be charged fees for the usage of the money. No matter how much that you pay, it is to be paid back with a profit. The borrower agrees to pay fees in order to get a lower interest rate, but some lenders are known for making their customers pay more than necessary. So take into consideration fees that you will be charged before making a loan application.
