Do You Know the Cost of Your Personal Loan?

Personal loans are unsecured which means that there is no collateral put up in case the borrower fails to repay the loan. Because there is no collateral or safety blanket for the lender, interest on personal loans is higher than for a secured loan. Different types of financial institutions charge different interest rates based on the credit score of the borrower. Credit Scores range from 300 to 850 and are reported monthly by the three credit bureaus of Trans Union, Experian and Equifax. Poor credit scores can more than double the amount of interest required for loans to those with excellent ratings. Therefore, it is always in your best interest to keep you credit rating as high as possible.

In addition to the interest charges, other fees may be required by the financial institution. Personal loan costs may include:

  • Application fees – Processing the paperwork can cost from $10.00 to as much as $100.00, depending on the finance company, the total amount of the loan, etc.
  • Bank draft processing fees – Lenders can charge a minimum amount just to set up the process of automatic payments, usually $25.00, with addition fees if the payment ever fails to clear.
  • Closing costs – Lenders may charge a flat fee or a percentage of the total loan.
  • Late payment fees – Fees for late payments can be as much as $30.00. Routine late payments may also result in the forfeiture of the loan contract.
  • Early payoff penalties – A lender can charge a percentage of the payoff as a penalty.

Do You Know the Cost of Your Personal Loan?

Choosing a Lender

When choosing a personal loans company, be extremely cautious. There are rogue companies that take advantage of a borrower, especially if that person seems desperate. Such companies may charge exorbitant interest fees and have many hidden charges.

A Study of Interest Rates

Interest rates can vary greatly from one lender to another and even from one state to another. Each state has a Usury Law that governs whether or not an upper limit is to be adhered to interest rates. Some states impose limits as low as 8%, some have limits as much as 25%, still others have no limits at all.

Examples of how interest fees can affect a loan are as follows:

If a person borrows $5,000, for a period of 3 years, at an interest rate of 5%, that loan will have a payback cost of $5,394.60. The same loan at an interest rate of 10% would cost $5,808.24, and the same loan at 15% interest would cost $6,239.88.

Review the Contract

When borrowing money for any reason, review the contract and know what you are signing. The papers must state how much is being borrowed, what the interest rates are and how often they are applied, what the monthly payments are and the total number of payments due. With or without these or other charges, personal loans are a valuable tool consumers can use to make a purchase or pay off a debt.


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