Understanding loan fees

Key points

• Fees can add a lot to the total cost of a loan.
• Common fees include establishment, monthly or account, early payout and late payment fees.
• A balloon payment is not a fee, but it is a large amount you need to plan for.
• Ask for every fee in writing before you sign.
• Compare the total cost of each offer, not just the rate.

Why fees matter

Two loans can have the same interest rate but cost very different amounts. The difference is often in the fees. Some fees are charged once. Others are charged every month for years. A small monthly fee can add up over a long term.

Fee names, amounts and rules differ between lenders and countries. This guide explains what the common ones are, so you know what to ask about.

Establishment fee

An establishment fee is charged when the loan is set up. It may also be called an application, setup or origination fee. It might be paid upfront or added to the loan. If it is added to the loan, you pay interest on it too.

Ask

• How much is it, and when is it paid?
• Is it added to the loan amount?
• Is any of it refunded if the loan does not go ahead?

Monthly or account fees

Some loans have a regular fee for keeping the account open. It might be monthly, quarterly or yearly. Because it repeats for the whole term, it is worth adding up the total.

Ask

• How often is it charged, and for how long?
• Can it change during the loan?

Early payout or break fees

If you pay the loan off early, some lenders charge a fee. This is often called an early repayment, early payout or break fee. It is more common on fixed-rate loans, where the lender has planned around getting interest for the full term.

The early payout estimator can help you think through the numbers using figures from your own lender.

Ask

• Is there a fee for paying early, or for making extra repayments?
• How is it worked out?
• Does it change over the life of the loan?

Late payment fees

If a repayment is missed or late, a fee may be charged. Some loans also charge extra interest on the overdue amount. Missed payments can also show up on your credit report.

Ask

• What is charged if a payment is late, and when?
• Is there a grace period?
• Who should you contact if you think you may miss a payment?

Balloon payments

A balloon (or residual) is a lump sum due at the end of some loans and leases. It lowers the regular repayments, but you still owe it. Often you pay more interest overall, because more of the loan stays unpaid for longer.

The balloon comparison tool shows the effect of different balloon amounts.

Ask

• How much is the balloon, and when is it due?
• What are the options if you cannot pay it in one go?

Other costs to check

Depending on the loan, there may be other costs, such as valuation, legal, registration, settlement or document fees. Some are charged by the lender and some by other parties. Ask for a full list.

Get it in writing

Before you sign, ask for a written list of every fee and charge, how much each one is and when it is paid. Check that the loan contract matches. If something is unclear, ask again until it is clear.

Then put your quotes side by side with the compare quotes tool to see the total cost of each.