Do Personal Loans Have Penalty APRs?

What Is a Penalty APR?

Annual percentage rate (APR) is the total yearly cost to borrow money, including upfront and ongoing fees, finance charges and the total amount you're financing. A penalty APR is a higher interest rate applied to a credit card account that is generally triggered if your payment is 60 days past due. Like APR, a penalty APR is expressed as a percentage.

The penalty APR can be considerably higher than your credit card's regular rate and typically lasts for at least six months. Your old APR is replaced by your new rate, and your account balance is charged interest based on the new rate. Typically, penalty APRs are based on a fixed interest rate plus a benchmark rate.

Common Personal Loan Fees

Although personal loans generally do not have penalty APRs, lenders may levy other fees to cover their costs when providing personal loans. However, some of the top personal loan lenders do not charge common fees.

The most common personal loan feesyou may encounter include:

• Application fee: This fee is usually paid at the time of application and covers the costs of processing and documenting your application. Application fees are typically nonrefundable even if the application is denied. This fee, taken out of the total loan amount, can vary significantly among lenders.
• Origination fee: When you take out a loan, you might be charged a loan origination fee. This fee is typically calculated as a percentage of the loan amount and covers the cost to process and underwrite your loan. Origination fees can range from about 1% to 10% of the total loan amount.
• Late fee: It's not uncommon for lenders to charge a late fee if you miss a payment or fail to pay your loan in full as outlined in the terms of your loan. Late fees can be a flat charge, or they may be a percentage of the amount you owe.
• Prepayment penalty: Some personal loan lenders may charge a prepayment penalty for paying down or paying off your loan early, but you can avoid this fee by shopping around for a personal loan without it.

Learn more: Common Personal Loan Terms You Should Know

How to Avoid Personal Loan Fees

You can avoid personal loan fees by closely reading your loan terms to ensure you avoid triggering late payment penalties or other fees. You may also be able to avoid unnecessary fees by comparing personal loans before you apply, choosing the option that's most affordable overall.

If you're not sure what the fees are, look at the loan's APR, which will include all the loan's fees as well as its interest rate. If you can't avoid origination or other fees, be sure to avoid any future late payment fees by signing up for automatic payments.

Learn more: How to Get a Personal Loan: A Step-by-Step Guide

What Are the Consequences of Late Payments on a Personal Loan?

Since payment history carries the most weight when calculating your credit score—accounting for roughly 35% of your FICO^® Score^Θ—a payment 30 days or more late can have a significant effect on your credit. Here are consequences of making a late payment on your personal loan:

• Your credit may be negatively impacted. Your credit score gives lenders an idea of how likely (or unlikely) you will be to repay your debts. Late payments can negatively impact your score, while paying all your debts on time can positively impact your score.
• It can be more difficult to be approved for credit. A lower credit score caused by late payments can make it challenging to qualify other types of credit and possibly even an apartment. On the flip side, good credit can open the door to many benefits, like better insurance rates and credit card offers.
• You might pay higher interest rates. Lenders consider it less risky to lend to borrowers with good credit than to those with poor credit. For that reason, people with high credit scores and a favorable credit history typically receive the lowest interest rates and best terms.
• You might be charged a late fee. If you miss a payment on a loan, you might be charged a late fee.

The Bottom Line

Although personal loans generally have no penalty APRs, it is possible to run up late fees and other charges if you miss a payment or make late payments on your loan. Doing so can hurt your credit and make it more difficult to qualify for another personal loan or other credit products in the future. Checking your credit scores and credit report regularly, which you can do for free through Experian, allows you to monitor your progress and keep an eye on your loan and other debt accounts.