A personal loan charge is a payment you will make on top of repaying your principal. Moreover, common loan charges include ongoing and upfront fees, as well as interest. Luckily, Monzi’s here to explain all of this in plain English.
Monzi is a lender-finding service. Therefore, we do not offer financial advice. Consider, as a result, seeking independent legal, financial, taxation or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
What is a loan charge?
Put simply, a loan charge is a fee or rate you repay on top of the personal loan principal. Ultimately, fees and interest are how lenders are able to keep running and stay profitable. Moreover, these costs are what you must pay for the right to borrow money today.
Different loan products will carry different charges and fees. For example, bad credit loans may come with higher costs than large secured loans.
Upfront charges
When you apply for a personal loan, you will often be charged an upfront fee. Often known as an establishment fee, this charge is designed to cover the lender for the cost establishing the loan – hence the name.
Keep in mind, Australian financial law limits what lenders can charge as an upfront fee. Specificaly, this maximum amount depends on the value of the loan. For example, a loan of $2,000 or less can charge a maximum establishment fee of 20% of the loan amount.
On the other hand, an establishment fee of $400 is the max lenders can charge on personal loans from $2,001 to $5,000.
Loan charge – interest rates
Interest rates can be defined as the relationship between the amount borrowed and the money repaid in return for the use of that money. Generally, this is expressed as an annual percentage rate (APR).
Again, there is regulation around what interest lenders can charge, depending on the loan amount.
For example, regulation caps loans valued between $2,001 and $5,000 at an annual rate of 48%, including all other fees and charges.
In addition, the type of personal loan you take out will also affect what you’re charged. For example, if you apply for a personal loan with a lacklustre credit score, the lender may apply a higher interest rate because of the added risk.
On the other hand, attaching an asset like a car or motorbike as security against the loan reduces the risk posed to the lender. After all, they can repossess the asset you use as security if you fail on your loan. Interest rates for secured loans are, as a result, generally lower.
Ongoing fees
Your personal loan may carry with it ongoing weekly or monthly fees. Lenders often refer to this as account keeping fees. Again, the ongoing charges on your loan will be determined by its amount.
For loans under $2,000 specifically, lenders cannot charge more than a 4% monthly fee.
Loan charge – penalty fees
Penalty fees are charged to the borrower for not adhering to the terms of their contract.
You may, for example, be charged a fee for paying your loan out early. This fee is calculated by the lender, taking a number of factors into consideration. Early payout fees are by no means industry-standard; many lenders offering personal loans may let you make early payments free of charge.
In addition, lenders will generally charge you if you miss or cancel a repayment. We also refer to this as a dishonour fee.
Comparison rates
Comparison rates are not a charge themselves. Rather, they condense most of the fees and charges plus the interest rate into one figure. Comparison rates, as a result, make it easier to get an idea of the true cost of a loan.
The below table provides a simple example of how comparison rates are calculated:
| Home loan | Interest rate | Charges | Comparison rate |
|---|---|---|---|
| Personal Loan A | 20% | 0.5% | 20.5% |
| Personal Loan B | 20.25% | 0.1% | 20.35% |
Please be aware that the above table is for demonstrative purposes only. In no way does the table above reflect the typical charges of personal loans.
What to do if you can’t afford your loan
Life always has a way of throwing up the unexpected. One moment you’re meeting all your repayments, and the next, you’re struggling.
If you find yourself struggling with your repayments, get in contact with your lender. You may, in certain situations, be eligible for a hardship adjustment.
All lenders have a hardship department in place to deal with unforeseen circumstances. Get in contact with your lender if you, for example, lose your job or split up with your partner. Lenders may offer a hardship adjustment if your ability to afford your repayments changes.
Remember, you need to provide evidence of hardship. This can include:
- bank statements showing a reduction in income
- medical certificates
- separation certificate from your employer.
Your lender may offer a resutructured loan if your application is approved.
Things to remember about loan charges
As we have mentioned, the charges applied to your loan will depend on the lender you pair with, as well as your personal situation.
Often, lenders apply rates and fees to your loan in relation to the perceived level of risk. For example, lenders will often charge higher fees to consumers with a poor history of paying their loans back in time.
On the flip side, lenders will often charge lower rates to consumers with good credit scores. After all, they have shown they are consistently able to meet the terms of their loan agreement.
What loan charge can I expect from Monzi?
Monzi is a free-lender finding service. Therefore, it won’t cost you a cent to use our website. If you are offered a loan from a lender, however, you will likely be charged some or all of the above fees.
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