The cost of a personal loan

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.

Is there a cost to a personal loan?

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.

What makes up the cost of an unsecured personal loan?

The total cost of an unsecured personal loan depends on the APR and fees not included in the APR.

Annual percentage rate (APR)

Your APR is made up of your interest rate and the set-up/origination fee for your loan:

• Interest. This is the percentage your lender charges for borrowing money from them. The rate you get will depend on your credit score and other personal factors.
• Origination/administration fee. This is a fee your lender charges to process your loan. An origination fee is typically 0.5% to 5% of your loan amount. Not all unsecured personal loans come with this fee.

Fees and charges not baked into the APR

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.

• NSF fee. Lenders typically charge $25–$50 for NSF fees. This is in addition to the NSF fee your bank charges for insufficient funds.
• Late fee. Not all lenders charge late fees, but some do. These charges will usually be a fixed dollar amount (around $25–$50) or around 3–5% of the unpaid payment.
• Loan insurance. It’s common for lenders to offer loan insurance, which may account for 1–5% of your loan amount. This product is optional.
• Prepayment penalty. This isn’t a common fee for unsecured loans. If it’s a federally regulated financial institution, it can’t charge this unless the loan is secured by real estate.

Related: Unsecured personal loans in Canada

What makes up the cost of a secured personal loan?

The total cost of a secured personal loan depends on the APR and fees not included in the APR.

Annual percentage rate (APR)

• Interest. Interest is expressed as a percentage. Your rate will depend on your credit score and other personal factors but will often be lower than with unsecured loans.
• Origination/administration fee. Origination fees cost between 0.5% and 5% of your loan amount.
• Inspection/appraisal fee. These fees cover the cost to have your asset appraised by a professional. They can cost anywhere from $300 to $500 for home appraisals.
• Title search fee. This fee covers the cost for your lender to search for information about the title of a property or vehicle. Price varies but is often under $200.

Fees and charges not baked into the APR

When determining the cost of a personal loan, look for these fees in your loan contract.

• NSF fee. Lenders typically charge $25–$50 for NSF fees. This is in addition to the NSF fee your bank charges for insufficient funds.
• Late fee. Not all lenders charge this. If they do, it will usually be a fixed dollar amount (around $25–$50) or around 3–5% of the unpaid payment.
• Loan insurance. It’s common for lenders to offer loan insurance with secured loans. It keeps you from losing your assets if you fail to make your payments due to an emergency.
• Prepayment penalty. You may encounter this fee with a home equity loan. Fees will vary based on your lender and province.
• Discharge fee. These fees are typically associated with mortgages and often run between $75 and $400, depending on your province.

Related: Secured personal loans in Canada

Finder survey: Are men or women more likely to rate fees as an important factor when applying for a personal loan?

A closer look at APR

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.

Related: Low interest personal loans in Canada

Comparing APRs vs interest rates

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 financial institutions must state APRs

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 closer look at the origination fee

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 take a look at two examples

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%.

• Fee added to your loan. If your lender adds the fee to your loan balance, you’ll have a balance of $10,400. You’ll pay $321.12 every month and $1,560.39 in total interest. Your APR will be 9.67%.
• Fee deducted from your loan. If your lender subtracts the origination fee from your funds, you’ll only receive $9,600 in your bank account but will pay off a loan balance of $10,000. You’ll pay $308.77 per month and $1,115.75 in total interest, and your APR will be 9.78%.

How much is the origination fee?

The amount you’ll be charged for your origination fee usually depends on a few factors:

• Creditworthiness. Generally, you’ll need to have good or excellent credit, exceed your lender’s income requirements and have a low debt-to-income ratio to qualify for low to zero origination fee.
• Loan amount. Lenders sometimes charge lower origination fees on larger loan amounts.
• Loan term. The longer your loan term, the more you might end up paying for your origination fee.

How does interest work on monthly payments?

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).

Example: $10,000 loan over 48 months with an APR of 9% and monthly payment of $249

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.

Fixed vs variable interest rate: How do they affect payments?

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.

• Fixed-rate personal loans. Your interest rate will stay the same for the duration of your loan. This will give you a clear vision of how much you’ll pay towards your principal and interest by the end of your term. You’ll also know for certain when your loan will be paid off.
• Variable-rate personal loans. A variable interest rate can increase and decrease during your term. While your monthly payments will stay the same, you may pay less or more towards your principal each month, depending on if your rate goes up or down. This can increase or reduce how long it takes you to pay back your loan.

Other fees or charges you may encounter

Surety fee

• What is it: If you get a short-term loan (three- to four-month terms) from an alternative lender, you may need to pay this fee. This fee is added to your payments and can be in the hundreds.
• How to avoid it: When discussing your offer with the lender, ask them to break down all the fees they charge. Also, carefully review your loan contract. This is not a common fee for bad credit loans with loan terms longer than six months.

Credit monitoring fee

• What is it: This is a fee to monitor your credit score.
• How to avoid it: Tell the lender you don’t want it. Lenders cannot require you to pay for it in order to get the loan.

Brokerage fee

• What is it: You may pay a broker fee with your lender if you were connected to them by a third party.
• How to avoid it: Apply to direct lenders or to brokers that don’t charge this fee, such as Loans Canada and LoanConnect.

Document prep and document registration fee

• What is it: You could be required to pay a fee for your lender to prepare or register your documents.
• How to avoid it: Ask the lender whether they charge this fee and apply somewhere else if they do.

Payment deferral fee

• What is it: If you’re unable to make a loan payment, some lenders will allow you to pay a small fee to defer it for the month.
• How to avoid it: Some lenders offer penalty-free grace periods, such as goPeer, and some allow you to skip one payment per year, such as the Big Five banks.

Cheque handling fee

• What is it: If you choose to make your loan repayments via cheques, the lender may charge you a fee to process them.
• How to avoid it: Get your loan payments automatically withdrawn from your bank account.

Collection agency recovery fee

• What is it: If your loan goes into collections, the lender may charge you the legal costs it has incurred to collect the amount owing.
• How to avoid it: Make on-time payments.

Ongoing admin costs

• What is it: There could be ongoing fees to maintain your loan. Lenders may call these membership or subscription fees and they could be charged weekly, monthly or annually.
• How to avoid it: Check lenders’ websites or ask them directly if they charge this. Carefully review your loan contract.

Bottom line

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.

Frequently asked questions

• How do I get a personal loan with the lowest APR?

  The best way to get a personal loan with the lowest APR is to compare multiple lenders. You can compare lenders individually by requesting quotes or using a broker to compare rates side by side. You can also work to improve your credit score, enlist a cosigner or use an asset to secure your loan to get a lower APR and reduce your personal loan cost.

• Are there lenders that don't charge personal loan fees?

  While many lenders skip origination and prepayment fees, most will charge, at minimum, NSF or late transaction fees. Compare APRs and make sure to read your loan contract carefully to see which fees you're expected to pay.