The cost of a personal loan is based on a number of factors. If you’re looking for the best personal loans, follow this guide to learn more about how much you might pay in interest and fees and how to reduce your cost.
The cost of a personal loan, whether it’s secured with collateral or not, depends on the interest rate and any fees you’ll pay when you get the loan and when you make your loan payments. Secured loans have more fees than unsecured loans. We break down the cost for both types below.
The total cost of an unsecured personal loan depends on the APR and fees not included in the APR.
Your APR is made up of your interest rate and the set-up/origination fee for your loan:
You’ll pay different fees and charges outside of your APR depending on which lender you choose. The fees you’ll pay should be disclosed in your loan contract.
The total cost of a secured personal loan depends on the APR and fees not included in the APR.
When determining the cost of a personal loan, look for these fees in your loan contract.
The cost of a personal loan should never include upfront fees. If a lender asks you to pay fees before you get your loan, it’s likely a scam. An illegitimate lender may ask you to buy loan insurance before your funds are deposited or to put a “down payment” on your loan. The best practice is to avoid lenders charging upfront fees, even if they have a decent reputation.
Your annual percentage rate (APR) is the interest rate you’ll pay on your loan, plus the set-up and admin fees. Your APR is expressed as a percentage and will usually be slightly higher than your interest rates alone if your loan comes with fees. Your APR may be the same as your interest rate if your loan comes with no fees.
Comparing APRs on different loans with the same term is the easiest way to tell which is the least expensive loan. If you only compare interest rates, you won’t be able to capture the full personal loan cost and could end up paying more than anticipated.
Let’s look at an example of the cost of a personal loan. Say you wanted to get a $10,000 loan and repay it over five years. You applied with two lenders and received the quotes below. The origination fee is added to the loan amount.
| Lender 1 | Lender 2 | |
|---|---|---|
| Interest rate | 11% | 9% |
| Origination fee | 1% ($100) | 6% ($600) |
| APR | 11.43% | 11.52% |
| Monthly repayment | $219.60 | $220.04 |
| All payments and fees | $13,175.91 | $13,202.31 |
If you only compare interest rates in the table above, then Lender 2 would be your obvious choice. But if you compare APRs, Lender 1 would offer the better deal. This is because Lender 2 charges a very high origination fee, which would be baked into your APR, making it more expensive than the other loan.
Federally regulated lenders in Canada are legally required to state the APR of a loan if it differs from the interest rate. They also need to break down the costs that make up the APR in simple terms. This makes it easier for borrowers to evaluate what is the cost of a personal loan and to compare what they’ll pay with different lenders.
A loan origination fee is a fee your lender charges to administer your loan. Typically, it’s a percentage of your loan amount – between 0.5% and 5%, but it could be as high as 10% in some cases. It’s either deducted from your loan amount before it reaches your bank account or it’s added to your loan amount.
Find out how your lender charges its origination fee to avoid disappointment.
Let’s look at the cost of a personal loan worth $10,000, with an annual interest rate of 7%, an origination fee of 4% ($400) and a loan term of three years.
If the loan does not have an origination fee, your loan balance will be $10,000, and you’ll pay $308.77 per month and $1,115.75 in total interest. Your APR and annual rate will be the same at 7%.
The amount you’ll be charged for your origination fee usually depends on a few factors:
With personal loans, the amount you owe is divided into equal payments, usually monthly, that are a blend of principal and interest.
Interest is calculated based on the balance you owe on the loan. With blended payments, interest is paid first and whatever’s left is applied to the principal.
In the beginning, you’ll pay a higher level of interest on each payment because your loan balance will be higher. As you pay down your balance with each payment, the amount of interest in each payment will also decrease and more will go towards the principal.
Your interest payment may fluctuate up or down slightly based on the number of days in the payment month (as shown in the table below).
| Date | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| August 1 | N/A | N/A | N/A | $10,000 |
| September 1 | $249 | $73.97 | $175.03 | $9,824.97 |
| October 1 | $249 | $75.10 | $173.90 | $9,651.07 |
| November 1 | $249 | $71.39 | $177.61 | $9,473.46 |
| December 1 | $249 | $72.41 | $176.59 | $9,296.87 |
| January 1 | $249 | $71.06 | $177.94 | $9,118.93 |
| February 1 | $249 | $62.96 | $186.04 | $8,932.89 |
| March 1 | $249 | $68.28 | $180.72 | $8,752.17 |
| April 1 | $249 | $64.74 | $184.26 | $8,567.91 |
As you can see in this table, over time, more of your monthly payments will go towards paying the principal.
With both fixed and variable rate loans, your payments will stay the same every month. However, the interest rate you get and the way the money is applied to your loan will vary.
The cost of a personal loan will depend largely on your interest rates and fees. These will vary by lender and may depend on factors such as your credit score or whether you secure your loan with an asset. Comparing the APRs and additional fees of multiple lenders is the best way to get the lowest personal loan cost for your needs.
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