What are "Fees" & why do they exist?
Posted on: 4 June 2020
By: Daniela Bucay
At Fig, we love knowing we're getting the best possible price. We always look for deals when we shop—free shipping, referral discounts, online coupons, etc. We also look for savings in our finances, by getting free checking accounts, credit cards where the bonuses cancel out the yearly fee, and so on. Unfortunately, many businesses, including a lot of lenders, charge fees for their goods and services that can add up to a lot of unplanned spending for the consumer, and a ton of profit for the company. In this post, we'll break down what kind of fees you might encounter, how they can add up, and what to consider when choosing a loan to make sure your choice fits your budget.
Fast Fig Facts on Fees
- Unlike interest rates, fees do not require disclosure by the lender!
- Many industries, especially financial services and airlines, rely on fees to make money
- Certain fees are included in the up-front costs of loans, and should not be considered as fees, but rather as part of the interest calculation.
- Always make sure you understand potential fees when getting a loan or any other product to make the best financial decision.
As we discussed in our earlier post, "What is Interest?", the interest rate plays a big part in determining the cost of your loan. Fees round out the rest of that equation and tell you how much your loan could really cost. Read on below for an overview of fee types across industries, a breakdown of how much a loan with fees can really cost, and more!
Case Study: Airlines
I am clearly not alone in hating how much airlines charge in fees. Many comedians and internet folk have joked about how soon, even collecting trash will cost a fee. Airlines originally started charging some of these fees after the 2008 recession, when fuel prices spiked and overall consumer spending dropped. They had to make up the difference somehow, and voila, bag fees came to save the day and give the airlines billions of dollars.
Unfortunately, even as fuel prices dropped steadily over the years, and people started having money to fly again, the airlines kept those fees. In recent years, airlines have begun to offer stripped-down plane tickets, with no choice of seat, terrible boarding groups, and additional penalties for changing your flight, and marketing it as Basic Economy or something of the sort. They then add more tiers of tickets, under names like Main Cabin and Premium Economy (I'm using American Airlines as an example, but almost all major airlines have a comparable structure), which naturally, cost more. Recently, airlines have come under attack for not saving that extra money for an emergency fund, but rather using it to buy back stock and give their shareholders more money. That is part of the reason they needed such a large bailout with the CARES Act.
Anyway, with all the potential fees, it gets confusing to know how much you'll actually pay for your travel. Although the coronavirus pandemic has forced many airlines to stop charging change and cancellation fees, they may come back, or that money may go into other fees, such as carry-on baggage fees. What's important to note here is that, as this Washington Post article argues, many fees are not clear to the average customer and are therefore somewhat predatory.
Borrowers often ask us to change their payment date and say that they are willing to pay any fee or additional interest to do so. It brings us joy to tell them that we never charge extra change fees, late fees, late interest, or anything like that. When you take out a Fig loan, you know, even before you sign the loan agreement, how much your total repayment will cost. This sets us apart from our competitors because it allows you to make an informed decision about your loan, right from the start. Here are some common fees we see lenders charge:
- Late fees
- NSF/Bounced payment fees
- Early repayment penalty fee
In Texas, lenders structure part of the interest as fees, due to state regulations. These include CSO and CAB fees, and will be included in the APR calculation. For example, in Texas, you do not get your money from Fig directly, but rather from a third-party lender. Fig acts as the CAB, so any money in CAB fees that you see on your loan disclosure goes to Fig. The third party (the actual lender) charges the interest, but they may also have their own fees.
Late fees can get really expensive, really fast, especially because they often combine with the nemesis of all savings goals, NSF fees. For example, one lender charges either $7.50 or 5% of the payment size for any payment that is over 10 days past due. Even if they had not pulled the payment and incurred an overdraft, you would still owe at minimum an extra $7.50 on the loan, which you did not know you would owe at the beginning. Let's say they also charge late interest, then that increases even more.
NSF fees are their own kind of nasty. Banks charge these when you overdraft your checking account (unless you have overdraft protection), and they average somewhere around $30 for every transaction that overdrafts you. As if that weren't bad enough, most lenders also charge their own NSF fees. The same lender that charges the $7.50 fee for late payments charges $30 for any bounced payment.
How Fees Make Loans Expensive
Let's say you have a loan with the lender in the example above, and you forget to change your payment date. They draft your bank account when you don't have enough money, and boom, $60 extra for that loan right there, between the bank's NSF and the lender's. Then, let's say you're not able to make that payment within 10 days of the due date, you add at least another $7.50 there. If you had a $500 loan, which they say costs $784.97 if you pay on time, and you bounce one payment and pay it late (just one payment), you've brought your total cost of loan up to $852.47. The lender will only keep $822.47, but that's still a huge difference in money coming out of your pocket. Worst of all, they can still say that the APR for the loan was 198.23%, even though the cost increased dramatically.
Fig never charges late fees. Ever. You could be over a month late on your loan and we still wouldn't charge you a fee. We believe that the damage to your credit score is punishment enough, and we trust you to repay us when you are able!
We also don't charge bounce fees, ever. If you bounce a payment with us, you may have to pay your bank their fee, but you won't have to pay us an extra cent. Just make your payment as soon as you're able to. Our payment processor does charge us for any returned payments, however, so a lot of returned payments can damage the likelihood of getting another Fig loan in the future. Truly, the only fee you will ever pay with Fig is the 3% debit card processing fee we charge in some states, but you can avoid that by just paying with your checking account!
Some lenders will not only not offer a discount on your loan for repaying it early, but they will actually charge a penalty for doing so! We think that's crazy. With Fig, you get a discount on the loan, as we don't charge you for interest that hasn't accrued. We don't charge you extra for setting up an early repayment, and in most cases, if you end up repaying your loan early without specifically requesting an early repayment, we'll refund the difference automatically after your payment settles!
We hope this post has started to show you how loan fees are such an important consideration when taking out a loan, a credit card, or anything else! Interest rates alone do not paint a complete picture, but unfortunately, in many places, the law only requires lenders to disclose interest rates. Before you take out a loan, make sure to ask the lender what fees they charge for common incidents, like late payments, bounced payments, and so on. Get their answer in writing so that you can go back to it if they charge you any undisclosed fees after you take out the loan. Or, to avoid that whole headache, apply with Fig, where we clearly disclose the cost of your loan from the get!
What's the craziest fee you've ever been charged? Have you ever thought you were getting a discount, only to have the fees inflate the cost of a product? We're listening at firstname.lastname@example.org, Facebook, Instagram, and Twitter.