Here are the common expenses of taking a personal loan and how to avoid them (2024)

Personal loans let you access extra cash in a pinch for almost any expense you could think of. Whether it's a home renovation, a wedding, a surprise medical bill or even funeral costs, you're sure to find a personal loan that fits your needs and your desired funding amount.

However, this money isn't free. You must pay the money back in its entirety, along with interest and any other fees that come with your loan. Fortunately, though, most borrowers can lower — or even eliminate — some of these expenses. CNBC Select breaks down how.

When it comes to borrowing money from a bank or other financial institution, it's pretty much a given that you'll be expected to pay interest charges on top of your monthly principal payment. Some personal loan lenders offer borrowers the choice between fixed rates and variable interest rates.

Variable rates fluctuate depending on the prime rate set by the Fed, so they can go up and down over the lifetime of your loan. As you can imagine, a lower interest rate can work to your advantage but having your rate change to a much higher one can cost you more money.

How to avoid it

It's impossible to avoid paying interest on your personal loan. However, there are a few things you can do to pay less interest over the life of your loan.

Paying off your loan early can help you save potentially hundreds on interest. This is because personal loan payments are usually paid in fixed, equal monthly amounts over a set period of time, so the faster you pay off the loan the more you can save on interest. Of course, you'll want to make sure the lender doesn't charge a prepayment penalty (more on this below).

Also, consider avoiding a variable-rate loan if interest rates are likely to increase. A variable-rate loan can be a solid strategy to pay less interest for some borrowers. But if the prime rate increases during the life of your variable rate loan, you'll be stuck paying even more interest than you were when you first accepted the loan. Of course, it's hard to predict what the Fed's prime rate will be, which is why a fixed-rate loan gives you more stability and lets you plan out your monthly payments with more confidence.

A late fee is a penalty that gets charged when you fail to make a full payment by the agreed-upon due date. Making a late payment — or missing one altogether — can drag down your credit score, so it's important to stay on top of all your personal loan payments.

The late payment policy can vary from lender to lender but most of the time, you'll be charged a fee for every late payment.

How to avoid it

The easiest way to dodge paying a late fee is by picking a lender with a flexible policy on late payments.

Happy Money is one lender that definitely qualifies — borrowers get a 15-day grace period for late payments. After the grace period ends, you'll be charged either 5% of the monthly payment amount or $15, whichever is greater.

A prepayment penalty is a fee that a lender may charge if you pay off your entire loan before the term is over. Because of this, it's also known as an early payoff fee.

The actual cost of a prepayment penalty varies depending on how it's being charged. There are three ways the fee can be charged: a percentage of your loan balance, the amount of interest your lender won't earn since you paid off the loan early, or a fixed fee.

A prepayment penalty could potentially run you hundreds or even thousands of dollars depending on how early you paid it off and how the fee is being charged.

How to avoid it

One of the easiest ways to avoid a prepayment penalty is to simply go with a lender that doesn't charge one. You'll be able to read all of the terms of your loan before signing on the dotted line so make sure you know what the repayment term is and what fees may be attached to the loan, including whether there's an early payoff fee.

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Personal loan expenses could potentially run you hundreds or even thousands of dollars if you aren't careful. While you can't skirt a charge like interest, you can minimize how much of it you pay and try to avoid common types of loan fees in the process.

Again, though, always be sure you agree with all the terms of your loan before accepting it.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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