Understanding the potential fees associated with your loan is crucial for making informed financial decisions. Here's a breakdown of some common fees you may encounter during the loan process:
Amortization: If the loan has a fixed interest rate, loan amortization explains how it’s scheduled into equal payments over the repayment term. Each payment usually includes interest and a payment that goes toward the loan principal.
Annual percentage rate (APR): The APR on a loan represents the total cost of a loan and is usually expressed as a percentage. It should include interest and any applicable fees.
Automated Clearing House (ACH): ACH payments are common in business loan agreements. They involve automatic withdrawals from the borrower’s bank account.
Balloon payments: Most loan payments include a portion of interest accrued and a portion of the loan principal. However, some business loans are set up in a way that all or part of the loan principal remains at the end of the term. In this case, you must repay one, large balloon payment.
Blanket lien: A blanket lien covers all of a business’s assets, rather than a particular piece of its collateral. If a borrower defaults, it allows the lender to attach to any of the borrower’s assets to recover their losses.
Closing costs (for some types of loans): Certain types of loans, such as mortgages, may involve closing costs. These include fees for services like appraisals, title searches, and legal documentation.
Cosigner: If you have no credit or bad credit, you may apply for a business loan with a cosigner to increase your chances of approval with a good rate. Your cosigner’s information and duties should be listed in the loan agreement.
Credit report fees: Lenders may charge a fee for obtaining and reviewing your credit report as part of the application process.
Default: You default on a business loan when you fail to make payments based on the loan agreement. The lender will have the right to take legal steps and recoup the balance you owe them.
Deferred payment loan: A deferred payment loan is when you and the lender agree that payments start on a certain date in the future, rather than right away like they normally do with traditional term loans.
Factor rate: While most business loans feature interest rates, some loans like business cash advances and invoice factoring use factor rates instead. A factor rate is typically a decimal that shows the factor of the total loan amount that will be paid back.
Insurance costs (if required): Depending on the type of loan and lender requirements, you may be required to purchase insurance, such as mortgage insurance or business insurance.
Interest rates: Interest rates represent the cost of borrowing and are calculated as a percentage of the loan amount. They can be fixed or variable, depending on the type of loan.
Late payment fees: If you fail to make a payment on time, the lender may charge a late payment fee. It's important to be aware of the grace period and any associated fees.
Legal and documentation fees: There may be costs associated with preparing and reviewing legal documents related to the loan.
Loan-to-Value (LTV) ratio: The LTV ratio refers to the portion of an asset’s value that’s covered by a loan. If you want to finance a commercial property or equipment, it will likely come into play.
Origination fees: Origination fees are charged by lenders to cover the cost of processing a loan. They are typically calculated as a percentage of the total loan amount.
Prepayment penalty: Some lenders will penalize you for repaying your loan early. A prepayment penalty is designed to help them make up lost interest.
Refinancing: If you refinance a loan, you take out a new loan to repay an existing loan. This strategy can help you land a lower interest rate or lower your monthly payments.
Returned payment fees: If a payment is returned due to insufficient funds or other reasons, the lender may charge a returned payment fee.
Servicing: Loan servicing is all about how the loan is managed. It may include how loan funds are disbursed, how payments are collected, and what happens if you default.