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Personal Loan Charges

A personal loan is provided by a lender to the borrower in the form of a lump-sum payment, usually by way of electronic transfer to the borrower’s bank account. The borrower agrees to pay back the loan over an arranged period of time, which is referred to as the ‘term’.

The first charge you may come across when taking out a loan is an arrangement fee, this charge covers the administrative costs faced by the lender in relation to processing your application and performing the various credit checks.

An additional, and generally optional, charge is for payment protection insurance. This will cover the repayments of the loan if you are unable to work due to illness or injury, or because of unemployment. If you are considering taking this option then be sure to check exactly what circumstances are covered, and if your type of work is allowed for under the policy, for example self-employed and casual work may not be covered at all.

The main charge for any form of loan is the interest, this is charged at a fixed rate on the amount that you borrow. The monthly repayments are calculated by adding up these interest charges along with the loaned amount before dividing this total over the number of months.

With any loan you can choose to pay off the debt early, in most cases such action will result in additional charges from the lender. Early repayment fees vary, but are often equal to the part of the interest you would have paid if you had kept the loan in place for the full term.

The charges associated with a personal loan are expressed by lenders as an ‘annual percentage rate’ (or APR as it is more commonly referred to as). This figure takes into account all of the charges that you must pay, including the interest, arrangement fees and other charges as well as the repayment term.

Calculating the APR is a fairly complex process, and isn’t something that you need to be able to do, all lenders are required by law to provide the APR for any of the loans they offer. This figure is designed to give a way of directly comparing the cost of loans and financing, the lower the APR the less the loan will cost.

The APR does not cover any charges that you might have to pay, such as early repayment fees, or charges for being late on a payment and so forth.