Lenders charge processing fees to cover some costs, such as preparing documents, reviews, and the assessment process. The price varies among lenders and may range from 1% to 10% of the expected amount. I will be required to pay processing fees once the application is approved, and I sign the documents. This fee is non-refundable even when something unforeseen comes up, and my application is rejected. Some lending companies prefer to charge a fraction of the entire loan amount while others base that figure on certain factors.
Factors That Influence the Processing Fee
Loan Repayment Period: The processing fee is higher for a long term debt than a shorter one.
Loan Amount: The bank or the lender may impose a higher processing fee on small debts and a lower one on larger amounts.
Creditworthiness: A person with an excellent credit score, low debt-to-income ratio, and exceed the income requirements imposed by the financier can qualify for a lower processing fee. This type of borrower poses a lower risk to the lender than a person with a poor score.
Most banks may not charge this fee upfront, but instead, they will deduct it directly from my loan. Thus they will not credit my account with the actual amount they approved. The advantage is that I will not pay interest on the processing fee. The second option is to add the cost to my loan balance. This is not a standard option among lenders. Therefore, the lender disburses the whole amount that was approved, but I’ll pay interest on the processing fee since it will be added on my loan. As a result, the overall cost of this debt will increase. Thus, when I’m applying for a credit facility, I should request the financier to adjust the proceeding to take care of the processing fee.
Additional Costs incurred when applying for a Loan
Although the processing charges have a given impact on the total cost of accessing credit, it is not the only fee that I will need to consider. One way that I can determine the cost of obtaining a credit facility is by considering the effective interest rate (EIR). This figure provides details on the yearly charges and interest of a particular loan. Therefore, to discover the actual differences, I should compare debts with similar terms. For instance, a seven-year debt has a lower EIR but will cost more on a five-year one. In addition to considering how EIR is competitive, I should look out for its break down. The following are some of its components.
Interest Rate: The annual interest rate may fluctuate over time. Lenders charge a yearly interest rate on long-term loans and a monthly rate on short-term debts.
Application Fees: This is different from the processing fees and is not common among lenders. However, some lenders charge this amount to cater for processing and underwriting my credit facility application. The borrower is required to pay this fee upfront during the initial application process, and this amount will not be refunded even if my request is unsuccessful. Since this fee is uncommon among banks and other financiers, the fee can be negotiated. Therefore, I need to obtain a breakdown of the charges before I commit to this debt.
Commitment fee: It’s levied on a credit facility that is not funded immediately. The charge is to make up for the lost interest due to delayed disbursement. It can be a fixed percentage of the entire loan amount to be disbursed or a flat fee. This fee can be avoided when I apply for a personal loan when I’m ready to utilize the funds.
Underwriting Fee: underwrites evaluates my risk levels when approving my application. Thus, this fee caters to the while assessment exercise. It’s an uncommon fee among lenders, and it’s one of the fees that can be negotiated down.
Late Fees: lenders penalize their customers whenever their repayment is not received on the due date. The fees can be a flat figure or a fraction of that specific repayment.
Prepayment Penalties: some banks or financiers penalize an early loan repayment. That means the lender will charge me a penalty for paying off my loan earlier and is equivalent to the amount of interest I would have paid had I stuck to the agreed term. The financiers’ aim of this penalty is to discourage early repayment that could cause them to lose the funds I would have paid as interest.
Non-Sufficient Funds Fees. It is another type of penalty that is charged when a borrower’s repayment is not received on the due date or when the cheque bounces. The common practice in the financial sector is to add this penalty to that the month’s expected amount.
Credit facilities have several unavoidable charges, but I don’t have to comply just because I need a loan. These extra charges increase the overall cost of my loan; therefore, It’s wise to search for a fancier that has minimal charges or none at all. In case I’m charged a fee for a loan that is already disbursed, then it’s prudent to contact the lender to either reduce the penalty or waive it. One of the mandatory charges is loan processing fees; thus, from the analysis, I should pay that fee since it is a typical fee among the lenders. However, the amount differs from one lender to the other.
The personal loan attracts several charges, and one of them is the processing fee that caters for the cost of handling my application. Although the fee is typical among lenders, the amount differs from financier to the other. There are additional charges besides processing fees that determine the effective interest rate. For that reason, I should use this ratio when comparing loans of the same term. Most of these charges are typical costs of a loan, while other fees are uncommon among banks or lending companies. Thus, such fees can be negotiated down or waived entirely.