No doubt about it, everyone borrows money. Certainly most of us use credit cards. Probably most of us have mortgages. Some of us have student loans. Maybe we need a car loan. When we look for these loans, we want to get the best deal. It used to be somewhat tricky to compare your options, but the federal Truth-in-Lending Act was passed in 1968 and it helped make comparisons so much easier. Among other things, it required lenders to characterize their loans using a clearly defined percentage called APR (annual percentage rate). APR expresses the cost of a loan as an annual percentage. It includes both interest charges and most of the fees charged by the lender. It neglects compounding (which something called APY takes into account). So, you can think of APR as interest + fees on an annual basis. As you might expect, fees vary by the type of loan you’re taking out. (For example, credit card fees are different than mortgage fees). Let’s take a closer look at some of these fees by loan type.
Mortgage Fees
The mortgage fees included in the APR are those charged by the lending institution. Here are some typical fees as listed by the Consumer Financial Protection Bureau:
- Origination and lender charges. These costs are charged by the lender for “originating,” or making you the loan. They are part of the price of borrowing money. Different lenders may choose to itemize these costs to varying degrees – it’s the overall total that matters. Common charges are labeled origination fees, application fees, underwriting fees, processing fees, administrative fees, etc.
- Points. Points are a charge you pay upfront to the lender. Points are part of the price of borrowing money and are calculated as a percentage of the loan amount. You can choose whether or not to pay points.
- Taxes and government fees. These fees are charged by your local government. They are charged in connection with the real estate transaction, but are usually not a cost of borrowing money.
- Prepaid expenses and deposits. These expenses may be associated with your loan or with homeownership. Typically, you need to pay the interest on your loan between the time you close and the end of that month. It’s also common to pay the first year’s homeowner’s insurance premium and make initial deposits into an escrow account to cover future homeowner’s insurance and property taxes.
Note that there are other fees that are paid directly to third parties and these are not included in the APR. These are charges for third-party services that are required to get a mortgage, such as appraisals and title insurance. You can shop separately for some of these services.
Credit Card Fees
Unlike mortgages, there are no fees associated with credit cards, so the APR only includes interest. The institution issuing the credit card may have other charges such as an annual fee, a late fee, interest on cash advances (normally higher than the credit card interest), a charge for transferring your balance from another credit card and so on. Since these vary from customer to customer and over time, they are not included in the APR.
Student Loan Fees
Student loans typically have only a few fees (typically application fees and origination fees). Some lenders do not charge these fees. If they are charged, they must be included in the APR. So the loan interest and APR on a student loan are the same or reasonably similar. Federal student loans generally have loan fees. These fees are a percentage of the total loan amount. A loan fee comes out of the amount of money that is paid out. This means the money received will be less than the amount that was borrowed.
Car Loan Fees
Loan fees for an auto purchase are collectively called prepaid finance charges. One example of such a charge is a loan origination fee. Different dealers charge different fees, so this is a good area to keep an eye on when financing your new vehicle. Naturally, you should compare dealer financing with bank or other third-party financing.
Of course, there are other types of loans and their details vary. The key concept to remember is that the APR is your best way to compare loan offers. If you’d like to talk more about loan fees, or go over any other financial matter, we can discuss things in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.