Read on to learn about what these fees are, and where they’re hiding out.
You’ve probably heard the ad – I think it’s for a big health insurer – where a customer asks for a latté (expecting to pay the advertised price) and the spritely sales assistant asks for an extra $2 for the milk, $1 for the cup, 50 cents for sugar… and so on. There are a few other clever ones for other industries which follow a similar narrative that have the intention to evoke a sense of disgust at unfair disclosure of prices. Ambiguous or opaque pricing is never a good thing.
Imagine you called up a carpenter and asked for a quote for re-doing the floors in your new office. If you agreed to go ahead with his services, you’d expect to pay the price quoted. And that price would be clearly shown, probably in bold font with a double underline, as a sum of all the bits and pieces involved in the job on the bottom of the quote. You’d know what you were getting and exactly how much you were up for at the end. It’d be safe to say that this notion of ‘knowing and understanding how much something is costing you before you sign up to it’ is one that ALL business owners adhere to when seeking products and services from all of their suppliers. It’s a no-brainer.
So, why should getting a loan be any different? You’d want to know and understand exactly how much it is costing the business and what options you have throughout the life of the loan before you sign up to it. The non-bank loan options now available to small businesses have increasingly improved access to capital to grow and proactively manage cash flow – an often celebrated thing – but it is important for these businesses to understand what they are committing to. A good lender will make it easy for you by quoting an APR and showing you a loan repayments schedule. Some don’t and leave businesses with a three dollar latté that’s actually going to cost them nine…
If you’re looking for a loan, here are a few things to look out for:
Also known as Upfront Fees, Origination Fees, Risk Assessment Fees, Documentation Fees, Administration Fees, and lots of other names. They’re often charged as a percentage of the loan. Make sure you take these into consideration when determining the actual cost of borrowing.
Direct Debit Fees
In most cases, your lender will set up a direct debit for your loan repayments which is actually a great thing – no admin or missed repayments because you are too busy running your business. The frequency of these repayments vary between lenders and can be daily, weekly, fortnightly or monthly. The thing to be aware of is that often a direct debit fee is charged each time money is repaid. A $3 fee, which may seem insignificant at first, paid daily for a six-month loan term actually equates to over $540. Again, consider these fees when making comparisons between lenders.
This is a big one. Before you sign up to any loan, understand your options to repay early. Many lenders will ask for the interest that they would have otherwise received from you for the remaining term of the loan. The fine print of these lenders usually states that there are no ‘fees’ for early repayment which usually means that there are no extra fees but you are still up for the unpaid interest amount.
Some lenders claim that they do not, in fact, charge ANY interest on their loans – just a fee on top of the amount that you repay to them over the life of the loan. The dictionary definition of ‘interest’ is money paid regularly for the use of money lent. You know where I’m going with this one.
The alarming thing is that once these ‘fees’ are added up and incorporated into a rate that shows the true cost of a loan, they are often unpalatable. The only way to accurately compare the cost of your loan to others is to look at the annualised sum of all fees and charges associated with the borrowing.
So, how should you compare lenders?
When shopping around for finance, we recommend you shop smart and don’t just look at the percentage of interest being charged.
If you’re not using Moula*, be sure to add in all the extra fees too, to see how much the loan will really cost you. To see what the total cost of a loan will be, you can use our friendly loan comparison calculator.
And if you are shopping around, don’t forget to read this piece about the hidden dangers of shopping around for credit, and how this may harm your credit score.