Demystifying Personal Loan Fees and Features

Who doesn’t need a bit of financial help, every now and again? Whether it's a car loan for your ideal set of wheels or a wedding loan for your upcoming nuptials, taking out a personal loan can help you reach your dreams sooner.

It's true that a personal loan can be a great banking product for these types of upcoming costs but it’s wise to do your homework. This way, you'll ensure you're signing up for a loan that comes with not only a great rate but with competitive features and low fees as well.

So before you start comparing personal loans, here's a breakdown of what you should look out for:

Fees

Let’s kick off our guide by talking about some of the fees that you could be financial nipped with. The two common personal loan fees are as follows:

• Upfront fee: When you apply for a personal loan, you could be charged an upfront fee. The application fee is generally between $0-$600. If you find a personal loan with a high upfront fee, you’ll want to ensure that the interest rate and features are competitive, to outweigh this cost.

• Ongoing fees: The same goes for any service fees that are charged. For instance if your personal loan has a $10 monthly fee it might not seem like much but over a 5 year term it will add up to $600.

If maths isn’t your forte, a good way of seeing how much these two fees will cost combined with the interest rate is by checking the...

• Comparison rate: In Australia, personal loan lenders are required to display a comparison rate beside the headline rate, which is known to show the ‘true’ cost of the loan. It doesn’t combine all fees that are attached to personal loans, however includes the two common fees mentioned above of an upfront fee and ongoing fee. Just be aware that the advertised comparison rate may be different to the rate you’ll pay as this is based on a $30,000 loan over 5 years. If you are borrowing more or less than this, your comparison rate will be different.

Thinking of taking out a personal loan with a fixed interest rate? Then you could be slapped with the below fee:

• Breakcost fee: While exit fees were banned on variable rate loans back in 2011, breakcost fees can still be charged on fixed rate loans. So if you plan on making extra repayments to pay out your fixed rate loan early, be mindful that if you pay out the loan early you could be up for a fee. This fee will be calculated by the lender, depending on a number of factors including the time left on  the original term, the rate your loan was fixed at and the current rate. 

Also remember to keep up your regular repayments, otherwise you may face this cost: 

• Late payment fee: Easily avoidable, a late payment fee is charged when you don’t make a payment by the repayment due date. This is usually a flat fee of around $30, and not based on the loan amount. Set up an automatic deduction using online banking or authorise a direct debit with the lender to avoid paying this.

Features

Now that we’ve run you through the common fees found with personal loans, it’s time to move onto the good stuff i.e. flexible features. Here are some to consider:

1. Fee free extra repayments:

When you look for a personal loan, you may be eager to simply get a competitive deal with a low rate and fees but did you know you could save big bucks through the simple feature of an extra repayments facility? The name is pretty self explanatory, as a loan with fee free extra repayments means you can make additional payments on the personal loan anytime you please free of any charges.

Scenario time. Jo takes out a $20,000 loan over a term of 5 years for his brand new car. The interest rate attached to the new car loan is 10.00%. If he makes an extra repayment of $200 a month he will slash the loan by 1 year and 10 months and reduce the amount of interest he pays by $2,136.

2. Redraw facility:

In an ideal world you would use your extra repayments facility to pay off your personal loan early and escape the grasps of paying interest but what happens if you need a bit of extra cash down the track?

Taking out a personal loan that not only comes with an extra repayments facility but redraw facility as well, can provide you with great flexibility. Imagine after a few years down the track you need some extra cash fast to pay for a home reno, car maintenance or your growing family? A redraw facility will mean you can draw upon those extra repayments you have previously made, giving you a bit of financial breathing room.

Repayment Tip: Only redraw on your extra repayments when it is absolutely necessary. Prioritise paying back you loan over lavish spending.  

3. Flexible repayment cycle:

Each employer sets up their payment days differently, so while Jess the hairdresser may get paid on a weekly cycle, Jane the lawyer may be on a monthly pay cycle. The solution? A personal loan that allows you to choose your repayment cycle either weekly, fortnightly or monthly.

Another reason to look for a personal loan with flexible repayment options is because repaying your loan fortnightly, rather than monthly will result in you paying off an extra month over a year.

Here’s an example: Over a year you will pay off $5,200 by making a $200 fortnightly repayment, compared to just $4,800 with a $400 monthly repayment.

4. Secured loan:

If you have an asset like a car, did you know you could use it to score yourself a better interest rate? That’s right, lenders reserve their best interest rates for secured loans, which is when you put up an asset as security for the loan. You may also be able to borrow more with a secured loan over a longer timeframe.

The reason providers will offer you a better deal is because you will be deemed less risky, as they can sell your asset to cover any loss from lending to you e.g you default on your loan. By comparison an unsecured personal loan, doesn’t require an asset for you to take out the loan.

Got an idea of what you’d like your personal loan to look like? Start your comparison below.