What are loan charges?
When an individual applies for any type of loan, whether it is secured, unsecured, a mortgage, or a hire purchase agreement, there will always be charges associated with it. These charges can take a number of forms and the applicant may have to pay some or all of these, depending on the type of loan which has been applied for. The charges incurred are to cover the initial administrative cost of setting up the loan, any valuation fee costs (if applicable), commission payments to sales staff, the ongoing interest charges on the balance of the loan and final settlement fees on closing the loan at the end of the term. In some cases these charges have to be paid up front, but very often it is possible to add fees to the loan balance. Although this saves the applicant from paying out charges initially, adding fees will work out more expensive overall as interest will also be charged on this amount.
What loan charges are there?
The most obvious loan charge is interest. This is the charge made by the loan company for actually borrowing the money. Interest can be added to the loan either at the outset of the loan as a lump sum, or on an ongoing basis, usually either annually, monthly or daily. There may also be an initial setting up fee, also known as an application fee or administration fee, which may be paid up front or added to the loan. If the loan is to be secured against a property, a valuation will be carried out to assess the adequacy of the security and there is usually a charge made for this. Other fees include redemption penalties or redemption admin fees. These are normally only charged if a loan is repaid before the normal maturity date of the loan and is normally more in the early years, reducing as the term progresses.
How do I know what charges I will have to pay?
When you initially apply for any type of loan, you will be provided with an illustration from the loan company. This will give details of the loan, how the interest is calculated and all the charges applicable to it and whether or not they can be added to the balance. Once the loan application has been agreed, the company will send you a loan schedule (a copy of which you will probably have to sign and return) along with the full terms and conditions of the loan, which will once again show the full details of any charges made and also when and under what circumstances they will be applied.
Can additional charges be added?
Provided that the loan is kept within the terms and conditions of the original loan agreement, no additional fees should be added from those described in the schedule, although if the loan has a variable rate of interest then this could alter the monthly repayments as interest rates change. Additional fees and charges could be added however, if the repayments were not maintained in full and the account were to fall into an arrears situation. Other situations where additional charges could apply would be where the terms of the original schedule are altered, possibly the loan term may be extended, a further advance taken, or all or part of the loan may be repaid early. Once again though, these are normally shown in the terms and conditions of the original agreement and it is therefore vitally important that you read and understand all the small print associated with your loan before you commit to signing the acceptance forms.