Types of personal and auto loan fees you should know

With personal and car loans, there’s more than just your principal and interest rate. Having knowledge of the different types of personal and auto loan fees helps you set your expectations and prepare your budget.

Here, we dive into the differences between personal and auto loans and the fees you may come across when taking out a loan.

Key takeaways

• Personal loans are versatile options to fund different expenses, like vacations, weddings, etc.
• Meanwhile, auto loans are strictly for buying used or new vehicles.
• Usually, personal loans are unsecured, so they tend to have higher interest rates than car loans.
• Auto loans are commonly secured with your car, so credit requirements are often less strict.
• Other than the principal and interest payments, personal and auto loans come with different costs, like origination fees, documentation fees, and more.
• With the right strategy, you can negotiate to lower or waive certain fees.

What is the difference between a personal loan and an auto loan?

Generally, personal and auto loans both have principal and interest payments. The principal refers to your original loan amount while the interest represents the lender’s charge for lending you credit or money. While both financing options are beneficial, shining light on their differences can help you decide which one aligns with your needs and situation.

Personal loans

Personal loans are flexible ways to finance a variety of your needs. Depending on your lender and agreement, you may be free to choose where to use the funds. It can be for your home renovation, wedding, vacation, or even a new car. Many banks, credit unions, and online lenders offer personal loans that can suit your situation.

Most personal loans are commonly unsecured – meaning you don’t need collateral to get approved for a loan. But that said, making late payments or missing any payment can harm your credit score. Some lenders also have secured personal loans. With this type of loan, lenders can seize your collateral if you fail to pay off your loan.

In general, unsecured loans have higher rates compared to secured loans. So, you need to meet specific lender requirements to get approved for an unsecured personal loan.

Pros of personal loans	Cons of personal loans
Flexible use of funding  Doesn’t require collateral	Usually have higher interest rates than secured loans Stricter credit requirements

Auto loans

Unlike personal loans, auto loans are particularly for purchasing a car – whether it be for used, new, or leased vehicles. Commonly, you have two car financing options: direct and indirect auto financing.

With direct auto financing, you work with commercial lenders, such as banks, credit unions, and online lenders. Meanwhile, in indirect auto financing, you get a loan from car dealerships. With this option, the dealer handles your loan application from start to finish.

Your car serves as collateral for an auto loan, so your lender can repossess the car if you default on your payments. Some lenders may also offer unsecured auto loans, but they tend to come with higher rates.

Because a secured loan reduces the risk for lenders, high credit scores are not a hard requirement to take out a car loan. Meaning you may get approved for an auto loan even with below-average credit.

Pros of car loans	Cons of car loans
Typically have lower interest rates than personal loans Lower credit score requirements	Risk of losing the vehicle if you default on your loan Limited to car purchases

Personal loan fees

Aside from your principal and interest payments, there are other personal loan fees and charges you should watch out for.

1. Origination fee

A loan origination fee is common in personal loans. Lenders charge this fee for the expenses related to your loan – from underwriting and assessing to funding the loan. Typically, this can range from 1% to 8% or may even reach 10% of your loan amount. In other cases, it may also be a flat fee.

Your origination fee can either be deducted from the money you receive or added to your loan balance. Say you apply for an $8,000 personal loan with a 3% origination fee. This means your origination fee is $240. So, rather than receiving $8,000, you may get $7,760.

2. Prepayment penalty

Prepayment penalties are charges you may incur if you pay off your personal loan before your loan term ends. Let’s say you have a 36-month personal loan. You then make extra payments every month. If you manage to pay your full loan in 27 months, you may need to pay a prepayment penalty.

Since you save on the interest when you close your loan early, this fee compensates for the loss that your lender may incur. This varies, so it can either be a percentage of your loan or a flat fee. Prepayment penalties are quite rare with personal loans, but look out for this before signing any loan contract.

3. Late payment fee

Late payment fees come into play if you fail to make on-time payments or pay the full balance at the end of your term. It varies per lender, but they are usually a percentage of your overdue balance or a flat rate. Typically, it ranges from around 3% to 5% of your monthly payment or $25 to $50.

Remember, your lender may report you to credit reporting agencies if you are behind your payments by 30 days or more. This can then stay on your credit report for about 7 years, so ensure you are up to date with your payments.

4. Documentation fee

Lenders may also ask you for documentation fees in some cases. These cover the expenses linked to the preparation of your loan documents. Though documentation fees are quite rare in personal loans, check the contract for this fee. Through this, you can be aware of any added costs to your loan.

5. Application fee

While uncommon, some lenders may require a one-time application fee to cover the costs of processing your loan application. Depending on your lender, this may be a flat fee paid upfront. Usually, you can negotiate with your lender especially if you have strong credit.

These fees are often nonrefundable even if they deny your application. Lenders must disclose any application fees when you apply for a personal loan, so pay attention to this potential cost.

6. Returned check fee

Returned check fees are sometimes called insufficient funds fees. They may apply if the money in your account is not enough to cover the payment you make. Simply put, lenders may require this fee if the check bounces back due to insufficient funds.

Let’s say you pay your $734 monthly balance using a check. If you only have $632 left in your account, your lender can’t deposit your check. That said, you may need to pay a returned check fee to cover the costs of processing your check.

These fees vary per lender, but they may usually reach $20 or more. So, verify your funds first before making any payment to avoid this penalty.

7. Payment processing fee

Though it’s uncommon with personal loans, some lenders might ask for a payment processing fee. While they may not cost that much, this fee is added to every payment you make. Considering this, the overall cost of the payment processing fee may be a bit significant over the life of your loan.

8. Credit insurance

Credit insurance is optional insurance that you may add to your personal loan. Depending on the type of your insurance, this may cover your loan payments in case of unemployment, accidents, or death.

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Auto loan fees

Similar to personal loans, you have to consider added expenses when purchasing a car with an auto loan.

1. Taxes

Your sales tax depends on where you are. While this tax is non-negotiable, some states don’t require sales tax when you purchase a car. Right now, five states don’t charge this tax – Alaska, Delaware, Montana, New Hampshire, and Oregon.

2. Title and registration fee

When buying a car, of course you need to register it with your state’s department of motor vehicles (DMV). This is where the registration fee enters. This fee covers the expenses linked to registering your vehicle.

Usually, your dealer arranges this process. Other than the state, the cost may depend on additional factors, like the car’s weight, value, age, and even horsepower.

3. Origination fee

Same with personal loans, auto loan origination fees cover the lender’s costs for processing your loan. It’s usually a percentage of your loan amount or a flat fee. However, it typically ranges from 1% to 2% of your loan.

So, let’s say you apply for a car loan worth $37,000 with a 2% origination fee. This means your origination fee is $740. Instead of getting $37,000, you receive $36,260.

4. Down payment

Based on your lender or dealership, you may need to set aside a down payment when you purchase a car. The percentage of how much to put down may depend on you, so it can be 9%, 15%, 20%, or more. Sometimes, lenders also provide car loans that don’t need a down payment.

Even though the requirements are not set in stone, you may benefit from allotting at least a 20% down payment if you can. Remember, the bigger the down payment, the lower your total interest is. Given that, you can save more over the life of your loan if you put down a generous amount.

5. Documentation fee

Documentation fees or “doc fees” are charges that cover the costs of handling the necessary paperwork for your auto loan. In some states, dealers have to follow a limit with this fee. Then, in other states, the fee can vary per dealer. Make sure you look up your state’s guidelines to have a clearer idea of how much this potentially adds to your car expenses.

6. Destination charge

If you buy a new car, the dealer can charge you the destination fee. The destination charge covers the shipment of the vehicle from the manufacturer to the dealer. Commonly, this amount is non-negotiable. You might be required to pay the entire destination fee even if you arrange the transfer yourself.

7. Prepayment penalty

Say you manage to settle your 48-month car loan in about 40 months. Your lenders may ask for prepayment penalties if you pay off your auto loan before your term ends. However, it’s uncommon for car loans to have prepayment penalties these days. So, try to review the loan contract and check if there are any penalties to avoid issues ahead.

8. Gap insurance

Gap insurance stands for guaranteed asset protection insurance. This covers the gap between the car’s current value and your loan amount in case your car is totaled or stolen. Keep in mind that this insurance is only optional, so you can choose to skip it.

How to avoid personal loan fees and auto loan fees

Since not all personal and car loans have extra fees, you can take some steps to reduce or avoid them altogether.

Take time to shop around

One way to avoid paying additional fees is to shop around. Some lenders charge extra costs while others do not. So, exploring the market for your options helps you discover those that offer low or no fees at all.

You can also use a personal or auto loan calculator to compare different offers from various lenders. Through this, you efficiently find the one that helps you save on your monthly payments and total loan.

Consider autopay

Another strategy you can try is setting up autopay. Since this allows automatic payments, you reduce the risks of missing any payments. And when you make timely payments, you avoid certain costs, such as late payment fees. Many lenders offer autopay, so have a look at various banks, credit unions, and online lenders that have autopay.

Negotiate

Lastly, don’t shy away from talking with your lender. Some lenders may be willing to consider your request especially if you have good credit history. By simply asking and initiating the conversation, you potentially open doors to fewer or waived fees.

Final thoughts

Personal and auto loan fees may raise your monthly payments and impact how much you can afford. That said, it’s crucial to understand how origination fees, prepayment penalties, and other extra charges affect your overall loan. This helps you factor in potential charges and weigh your options. So in the end, you can decide which loan you’re comfortable with and which satisfies your goals.