What is a personal loan, and how much will you pay back in total?

Summary

A personal loan pays you the whole amount at the start, and you repay it in equal installments over a set term. The total you repay depends on the interest rate, the term, and any fee the lender takes out before the money reaches you. In Upgrade's published example, a $10,000 loan over 36 months with a 5% origination fee puts $9,500 in your account and costs $341.48 a month, or $12,293.46 in all.

How the loan works

The Consumer Financial Protection Bureau describes personal installment loans as closed-end loans: the lender gives you all of the money at the beginning, and you pay it back in set amounts over a specific period. Payments are generally the same for the life of the loan. The rate can be fixed or adjustable.

Sizes run from several hundred dollars to several thousand or more, and terms from a few months to several years. The CFPB lists large purchases, unexpected expenses, and consolidating existing debt as common reasons people take one.

Where a deducted fee goes

In Upgrade's example the interest rate is 13.94%. The 5% origination fee, $500, comes out of the loan proceeds, so $9,500 arrives in your account while the payments are calculated on the full $10,000. Upgrade discloses the APR as 17.59%. The CFPB defines APR as the interest rate plus the other fees charged with the loan, origination charges included, so the $500 fee shows up here as 3.65 extra percentage points.

Over 36 payments you hand back $12,293.46 for $9,500 received. That is $2,793.46 more than the cash you got, and it is the number that shows up as the finance charge on the disclosure you sign; the final-offer article explains each box on it.

Now take the fee away. A lender charging the same 13.94% with no fee would bill the same $341.48 a month, because the payment is set by the $10,000 balance, the rate, and the 36 months. The difference is that all $10,000 lands in your account. Discover says its loans carry "no fees of any kind," and LightStream advertises loans with no fees or prepayment penalties. On a no-fee loan the APR and the interest rate sit close together, so comparing APRs compares the real cost.

Other charges on the CFPB list

Besides origination fees, the CFPB's list of common charges includes documentation fees, credit and disability insurance (generally optional), non-filing insurance on secured loans, and late fees.

A late fee is charged only if a payment slips. Under Regulation Z, the lender's pre-signing disclosure has to state any dollar or percentage charge for a late payment.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.