Personal loans with no fees

A loan without fees naturally seems attractive, but it’s worth knowing the cost in the long-run and how to weigh up your options.

Updated

Personal loans can be a great tool to help you out of a sticky financial situation, or to help finance a large purchase quickly. It’s important to compare the best deals and choose the option with the lowest costs. A loan with no fees attached is likely they to appeal, but while in some cases it will be cheaper, that’s not always the case. Here’s what you need to know.

What fees do loans normally have?

When you borrow money, you’ll generally need to pay it back with interest. Although you might not think of it as a fee, the interest rate is usually how lenders cover their costs and make a profit.

In the world of personal loans, the key figure that lenders use to promote their products is the “annual percentage rate” (APR). The APR is designed to provide an annual summary of the interest you’ll pay, plus any mandatory fees, and must be calculated by all lenders in the same way. This makes it a handy benchmark for consumers looking to compare loans.

Aside from the interest, the main fees (that won’t be included with no-fee loans but may feature on other personal loans) are:

  • Set-up fee. A one-off fee covering the cost of administering a loan. It’s sometimes called an “admin” fee. If you don’t want to pay this upfront, lenders may simply add this on to your outstanding balance.
  • Late payment fees. It’s common for lenders to charge one-off fees to punish late repayments. They’ll also add additional interest. What’s more, late loan repayments will damage your credit score, making it harder for you to obtain loans in the future.
  • Early repayment fees. Most lenders will tell you there’s no penalty for paying off their loans early, or for making overpayments. But what many borrowers don’t realise is that they will commonly be charged up to two months’ further interest on any sums paid early. Lenders sometimes bury this information in the small print, and don’t always make it easy to clear the loan early.

How do loans with no fees work?

Personal loans without fees won’t come with a set-up fee. This means the interest rate and the APR will be the same.

However, nearly all of these products still do charge late payment fees. It’s never a good idea to accept a loan where you’re not confident about making the repayments on time. Some will also continue to charge interest on early repayments up to two months beyond the date on which the amounts were paid.

What’s more, lenders tend to up the interest rate on their “no fee” products to make up for the shortfall from not charging a set-up fee. In this case, it could be argued that the administration costs are simply spread over the term of a loan, rather than charged as a one-off fee.

Pros and cons of no-fee loans

Pros

  • Easier to understand how much you’ll pay
  • Less hassle to organise

Cons

  • Can be deceptive, as they’re not always the cheapest deal

Example

Here’s a scenario that a typical borrower may face.
Samantha wants to borrow £5,000 over two years.

  • Lender A charges a fixed interest rate of 6%, plus a 0.5% set-up fee. The total amount payable is £5.368.47.
  • Lender B charges a fixed interest rate of 6.3% with no fees. The total amount payable is £5,334.71.

Although Lender A is advertising a lower interest rate, the total amount payable is higher than Lender B’s deal once the set-up fee is considered. The easiest way to avoid being misled when comparing deals like this is to compare the “total amount payable” or APR of the two deals. These will both take interest and fees into account.

How to compare loans with no fees

As well as comparing the “total amount payable” and APR, have a look at the minimum eligibility criteria. It’s no use applying for the product if you don’t meet the criteria.

Consider the late repayment charges, too. These tend to be punitive, plus there will be added interest – and damage to your credit score. It’s unwise to accept any loan unless you’re certain you can meet the repayments.

Common requirements for getting a personal loan with no upfront fees

Common requirements often listed among lenders’ minimum eligibility criteria include:

  • You’re over 18 years old
  • You have a bank account
  • You have proof of employment or regular income
  • You agree to go through a credit check

Frequently asked questions

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