Loan Fee

Loan Fee
A loan fee is any fee associated with a loan or credit card that does not include the interest rate.

What is a Loan Fee?

There are many kinds of fees associated with borrowing money. Any fee that you’re charged for borrowing money through a loan or credit card, that isn’t the interest rate, is considered a loan fee. Some of the most common examples are application fees, processing fees, origination fees, closing annual fees, funding fees, late fees, overdraft fees, NSF fees, and prepayment fees. Because similar loans may have different fees associated with them, you should always compare loans using their APR, or annual percentage rate, rather than just their interest rate. The APR shows you the total cost of a loan, including all fees, so you can fully understand which loan works best for you.

What is an application fee?

An application fee is a cost a borrower must pay when applying for a loan. It is meant to pay for the process of approving a loan. In many cases, an application fee cannot be recovered, even if the loan is denied1. The cost of an application fee can vary widely depending on the type and amount of the loan you’re seeking.

What is an origination fee?

An origination fee is like an application fee and is used interchangeably by some lenders. Other times, there may be a differentiation between the application fee, which you’ll pay when you submit your application, and an origination fee that you’ll only pay if you’re approved. Origination fees are most often charged when securing a mortgage. It might be a set fee or a percentage of the total loan being taken out.2

What is a processing fee?

A processing fee is a specific kind of application fee. It is paid by the borrower to cover the lender’s expenses arising from the processing of the loan, including documentation, background checks, employment verification, credit checks, and whatever else the lender deems necessary.3

What is an annual fee?

Technically “annual fee” is a term that could apply to any yearly fee, but when it comes to finance, it most commonly applies to a fee credit card holders must pay. Reward cards, which build up points as you use them that can later be redeemed, and secured cards, which require a deposit and are often issued to people with lower credit, are two kinds of cards likely to have annual fees attached. An annual fee might be paid all at once per year or broken up over the course of the year.4

What is a funding fee?

A funding fee is paid by veterans obtaining a VA loan (a loan guaranteed by the US Department of Veterans Affairs). United States military veterans are entitled to a home loan with no money down. The funding fee helps cover costs associated with the loan and provides coverage for defaults. The fee is based on a percentage of the total loan that varies based on the veteran’s type of service. Veterans who received a disability connected to their service are exempt from the funding fee.5

What is a late fee?

A late fee is charged whenever you miss a payment on a loan or credit card. Aside from the actual cost of the late fee, late payments can result in a hit to your credit rating and higher interest rates. That’s why it’s important to do everything you can to avoid making payments even a day late.6

What is an overdraft fee?

If you attempt to withdraw or spend more money than you have in a bank account, the bank may still allow the transaction to occur and charge you an overdraft fee. Overdraft fee amounts and policies vary from bank to bank. Some banks might waive an overdraft fee for the first mistake. Either way, it’s better to keep an eye on your accounts, because multiple overdraft fees in a row can add up very quickly7.

What is an NSF fee?

NSF stands for non-sufficient funds. This is a fee that the bank can charge you if someone tries to cash a check from your account and you don’t have the funds available to cover it. The bank will likely refuse payment to the check casher, then charge you for the attempted transaction. You could also be charged an NSF fee for trying to deposit a check you received from someone with non-sufficient funds. If that happens, you’ll have to contact the check writer to get them to pay the amount of the check and the fee. Hopefully it was all a misunderstanding and you won’t be forced to take them to small claims court.8

What is a closing fee?

Closing fees are paid by both buyer and seller as a real-estate transaction is completed. There are a lot of costs that go into closing fees, including application fees, building inspection, attorney fees, taxes, and many more expenses. It’s up to you to find out exactly what you’ll be expected to pay in closing fees and see if any of them might be negotiable.9

What is a prepayment fee?

Prepayment fees are sometimes charged to borrowers when they choose to pay off the rest of their loan early. Because the lender makes their money through interest and early payment reduces the amount of interest, a prepayment penalty is one way the lender can protect their investment. Prepayment fees are normally associated with mortgages or car loans.10

Items to remember…

It’s very important to know what fees you’re being charged. Whether it’s on a new credit card, a mortgage, or a personal installment loan, make sure to familiarize yourself with the types of fees that are in your loan agreement.

Some lenders use different terms for different types of fees. It may be referred to as an origination fee with one lender, while another lender calls it an application fee. If you aren’t sure what the fee is, never be afraid to ask. Ultimately, you’re responsible for the loan if you sign the agreement. Never sign a loan agreement without being completely familiar with all the terms, fees, and lingo.

References:

  1. “Origination Fee.” LendingTree. Accessed October 20, 2016 from https://www.lendingtree.com/glossary/what-is-origination-fee

  2. McDonald, Michael. “What is a Loan Origination Fee?” Go Banking Rates. Accessed on February 8, 2017 from https://www.gobankingrates.com/mortgage-rates/loan-origination-fee/

  3. “Loan Processing fee.” Investor Words. Accessed on February 8, 2017 from http://www.investorwords.com/19116/loan_processing_fee.html

  4. Irby, LaToya. “Credit Card Annual Fee Explained.” The Balance. Accessed on February 8, 2017 from https://www.thebalance.com/credit-card-annual-fee-explained-959986

  5. Birk, Chris. “VA Funding Fee: Who Pays What and Why.” Veterans United Network. Accessed on February 8, 2017 from https://www.veteransunited.com/valoans/va-funding-fee-explains-the-fee-who-pays-what-and-why/

  6. “How Late Payments Can Affect Your Credit.” Credit Karma. Accessed on February 8, 2017 from https://www.creditkarma.com/article/late-payments-affect-credit-score

  7. Tierney, Spencer. “Overdraft Fees: What Banks Charge.” Nerd Wallet. Accessed on February 8, 2017 from https://www.nerdwallet.com/blog/banking/overdraft-fees-what-banks-charge/

  8. Bernardo, Richie. “NSF Check: When A Check You Wrote (Or Received) Bounces.” Wallet Hub. Accessed on February 8, 2017 from https://wallethub.com/edu/bounced-check/13879/

  9. “What Are Closing Costs and How Much Are They?” Zillow. Accessed on February 8, 2017 http://www.zillow.com/mortgage-learning/closing-costs/

  10. Zillow. “Understanding a Mortgage Prepayment Penalty.” US News. Accessed on February 8, 2017 from http://money.usnews.com/money/blogs/my-money/2011/08/04/understanding-a-mortgage-prepayment-penalty