When it comes to choosing a personal loan, the interest rates and fees that you are charged will make a big difference to the lifetime cost of your loan. This is something you need to think about carefully when choosing a term (or length) of loan.
A longer loan term shrinks your monthly repayments – which your wallet will appreciate! For example, a $10,000 loan over five years at 10% interest would cost around $212 per month. That same $10,000 loan repaid over three years would cost around $323 per month.
So for the sake of your day to day budget, it’s tempting to take out a longer term to make your repayments smaller, even while you can still afford to contribute more. For these reasons, it’s common to take out a longer loan term and pay it off earlier. But there is a hidden trap in paying off your loan “before its due time”, and that is the dreaded early repayment fee.
While repaying your personal loan earlier than expected is great (well done!), you can also come across unexpected fees which are called early repayment fees. These can range from $0 all the way to $800. Canstar’s analysis of 290 personal loans from 78 lenders has found that the most common fee being charged (that is not $0) is $150.
Fixed rate personal loans will generally charge you what is called an “economic cost” or “fixed cost” for repaying a loan earlier than expected. Institutions publish how they calculate this cost, and it is a good idea to get familiar with these calculations if you are thinking about taking out a fixed loan but you know you might repay it early.
Let’s take a look at the worst case scenario of an $800 early repayment fee:
This may be an extreme case, but it is a good example that shows it is always important to check the fees of a loan before deciding to go any further, since you never know when you’re going to find yourself in a sticky situation.
When choosing a loan term, it’s worth looking beyond the monthly repayments to calculate you’re your loan will cost over its life.
Using the example of a $10,000 loan at 10% interest, the approximate total cost over the life of you loan could be as follows:
| Length of loan | Amount of loan | Monthly repayment | Total cost over length |
|---|---|---|---|
| 2 years | $10,000 @ 10% | $461 | $11,075 |
| 3 years | $10,000 @ 10% | $323 | $11,616 |
| 5 years | $10,000 @ 10% | $212 | $12,748 |
| 10 years | $10,000 @ 10% | $132 | $15,858 |
Whatever loan term you choose, make sure you pick a personal loan with a competitive interest rate and fees.
Canstar has researched no less than 290 products from 78 lenders. We’ve separated these into car loans, secured and unsecured personal loans so it will be that much easier for you to find what you’re after.
