Loan Fees: What You Should Know

Loan fees add to the cost of the loan and make up what is known as the annual percentage rate, or APR. Loan fees will vary depending on the amount of loan, type of loan and lender that is offering a loan. The different types of fees are created to compensate the lender for the risk associated with providing the loan, particularly for at-risk borrowers.

Types of Loan Fees

The types of fees that are associated with most loans are late fees, processing fees, and origination and activation fees. These are a few of the fees that add to a loans costs. Truth in lending laws were implemented by the government to help consumers compare fees. The lending laws state that a borrower must be disclosed upfront the cost of the loan. There are no hidden fees allowed in the loan agreement. This disclosure allows a borrower to calculate the true cost of borrowing as well as accurately compare the terms, rates and conditions of comparable loans.

Late Fees

Late fees are commonly used by lenders as a way to encourage borrowers to pay their loan obligation on time. They are generally calculated after a set period of time and can be costly to a borrower who fails to make acceptable payment arrangements. Late fees can add significantly to the cost of a loan and can thus raise the APR significantly. 

Processing Fees

Processing fees are an add-on that some lenders price into the cost of providing the loan for certain borrowers. Processing fees represent the costs to the lender, associated with gathering credit reports, financial information and other documentation necessary to approve the loan. The processing fee can be a flat rate or percentage of the loan amount, depending on the lender.

Origination and Activation Fees

Origination or activation fees are used by some lenders for the establishment of a loan account with the lender. This fee is used to offset costs associated with administering the loan on behalf of the borrower.

It is important for all borrowers to understand the significance of all fees associated with their loan and ask questions as to how these fees impact their APR and total loan cost. Understanding loan fees helps a borrower control their credit and obtain the best loan that is affordable and meets their needs. The fees noted above are not all fees that are implemented at the time of a loan, so it is important to understand what you are signing.