Loan fees and charges

When you borrow money, the interest rate is only part of the cost. Lenders can also charge fees to set the loan up, fees when a payment is late, and charges if you pay the loan off sooner than agreed. On a mortgage, the fees alone can run to well over £1,000¹, and on high-cost short-term credit the fees and charges on a typical payday loan were reduced from more than £100 to around £60 only after regulation stepped in².

The good news is that most of these costs have to be shown to you before you sign. The APR, the pre-contract information and the loan quote are all designed to make the charges visible, and there are caps on what payday lenders can charge³. This page explains where loan fees appear, what each type of fee is for, which costs sit outside the headline figures, and what to do if a charge looks wrong or unfair.

What loan fees and charges are and where they appear

Loan fees and charges are the costs a lender or broker adds on top of the interest you pay. They appear at several points in the life of a loan: when it is set up (arrangement, product or broker fees), while it runs (monthly fees or charges for missed payments), and when it ends (early repayment or redemption charges). Banks can also charge a fee to cover payments where there is not enough money in your account, which is a separate cost from the lender's own late fee⁸.

The scale of these charges depends heavily on the type of loan. On mortgages, some deals are offered fee-free while others come with fees well over £1,000⁹. At the other end of the market, payday loans carry very high costs by design: rates higher than 1,000 per cent APR are common¹⁰, and lenders with very high interest rates typically charge 450 per cent to 2,500 per cent APR¹¹. Regulation has pushed these costs down over time. The National Audit Office reported that fees and charges on a typical payday loan were reduced from more than £100 to around £60 following the price cap on short-term high-cost credit².

Fees also differ by how the loan is sold. A loan arranged through a credit broker can carry a broker's fee as well as the lender's charges, and the Financial Ombudsman Service regularly hears from people charged a fee by a broker for finding a loan, sometimes without a loan ever being offered¹². The type of borrowing matters too: buy now pay later firms such as Laybuy and Clearpay penalise late payments with extra fees¹³. Before comparing any loan, it helps to know which of these charges apply, because two loans with the same interest rate can end up costing very different amounts.

APR: the figure that includes most fees

The Annual Percentage Rate, or APR, is the single figure most worth understanding, because it is built to roll the interest and most of the fees into one number. nidirect, the Northern Ireland government service, explains that it takes into account the total cost of borrowing, including the total amount of interest you will pay, any additional charges such as a monthly fee for taking out the card, and when and how often you must pay the interest¹⁴. StepChange's glossary puts it simply: the APR shows how much it costs to borrow money over a year, including interest and fees¹⁵.

On mortgages the definition is the same in spirit. The HomeOwners Alliance describes the APR as the total cost of your mortgage loan, including all costs, arrangement fees and interest charges, shown as a percentage rate¹⁶. RBS explains that the APR is a way of presenting the interest payable on what you are borrowing, added up with other charges, such as arrangement fees⁵. Business Debtline adds that the APR is generally higher than the quoted interest rate and shows the true cost of the credit¹⁷.

One important limit on the APR is the word "representative". To be called representative, an APR must be the rate offered to at least 51% of people, but it is not guaranteed, and anyone applying may be offered a different rate⁵. If you are offered a higher rate because of your circumstances or credit history, the rate you actually get is your personal APR, and the total cost will be higher than the advert suggested. The APR is therefore a comparison tool between loans, not a promise of what you will pay. Our page on loan APR, representative APR and personal APR explains this in more detail.

Arrangement and product fees

An arrangement fee, sometimes called a product fee, is a charge simply to get the loan. It is most familiar on mortgages. Which? notes that many mortgages charge a product or arrangement fee just to get the loan, which will typically cost around £1,000, though some fee-free products are available¹⁸. On selling a house, Which? likewise reports that it is common for lenders to charge around £1,000, and that some lenders offer low rates but charge fees of up to £3,999⁴. A low interest rate with a high fee can cost more overall than a slightly higher rate with no fee, which is why the APR, which includes arrangement fees, is a fairer basis for comparison than the headline rate alone.

Two practical points about arrangement fees are worth knowing. First, it is possible to add upfront mortgage fees to your loan rather than paying them in cash¹⁹, and you can add the fee to the mortgage balance, though doing so will mean you pay interest on the fee, costing you far more overall¹⁸. A fee added to the mortgage balance accrues interest for the whole remaining term, so it costs more in total than the same fee paid upfront. Second, arrangement fees can reappear later in ways people do not expect: if you port your mortgage to a new property and need to take out an additional product, there could also be an arrangement fee for that additional product¹⁹.

Not every lender charges these fees. Loans from credit unions are generally cheaper than loans from most other providers for smaller amounts and do not incur set-up fees, administration costs or early redemption fees²⁰, a point Which? makes in the same terms²¹. For smaller borrowing, a credit union loan can avoid the fee structure of mainstream and high-cost credit entirely. Where a fee is charged, the total charge for credit rules have long required certain fees to be included, such as any fee payable to a mortgage intermediary for arranging the contract and any higher lending charge²².

Interest is the main cost, not the fees

Fees grab the attention because they arrive as one-off lump sums, but on most loans the interest over the term is by far the larger cost. This is why the APR matters more than any single fee: the APR adds the interest payable on what you are borrowing together with other charges, such as arrangement fees⁵, and on a mortgage it captures the total cost including all costs, arrangement fees and interest charges¹⁶. A £1,000 arrangement fee on a large mortgage can be a small fraction of the interest paid over the term, while on a small short-term loan the fees can be the dominant cost.

The exceptions are the products built around fees rather than interest. Charge cards do not charge interest on the amount borrowed at all; the cost comes in the form of fees¹². Buy now pay later services generally charge no interest, but late payments to Laybuy and Clearpay are penalised with extra fees¹³. And in the high-cost short-term credit market, the fees and charges are the story: before the cap, fees and charges on a typical payday loan came to more than £100, and the cap brought this down to around £60². From 2 January 2015, a 30 day loan repaid on time carries no more than £24 in fees and charges for every £100 borrowed³.

For anyone comparing loans, the practical rule is to look at the total amount repayable, not the fee list in isolation. Two loans can have identical arrangement fees and wildly different total costs because of their interest rates, and two loans with identical rates can differ by thousands of pounds because of a single fee. The pages on how loan interest is calculated and how personal loans work set out how the interest side of the equation builds up.

Early repayment charges: what paying off early can cost

Paying a loan off early sounds like it should always save money, but some loans charge for it. The FCA's glossary defines an early repayment charge as "a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract"⁶. These charges are most common on mortgages with fixed or discounted introductory rates, where the lender has priced the deal on the assumption it will run for a set period. Which? warns that these fees can add up to tens of thousands of pounds, so it is vital to think about when you will next move home before taking a deal with a long tie-in¹⁹.

Early repayment charges are not universal, and government-backed schemes treat them differently. The Green Deal scheme allows you to pay the loan off early but there may be extra costs²³. Help to Buy equity loans are the opposite: there are no early repayment charges, but you will pay an administration fee and other charges when you apply to repay²⁴. Credit union loans, as noted above, do not incur early redemption fees²⁰. On car finance, ending the agreement early raises different questions again, covered in voluntary termination or early settlement of car finance.

If you are charged an early repayment fee and believe it is unfair, the Financial Ombudsman Service does deal with complaints about early repayment charges on mortgages from consumers who believe a charge is unfair²⁵. The general approach to disputing any loan charge is the same as for other complaints, and is set out in the final section of this page. Before settling any loan early, ask the lender for a settlement figure, which shows the remaining balance, any interest saved and any charges that apply: paying off a loan early and settlement figures explains how these are worked out.

Late payment and missed payment charges

Missing a payment usually triggers two separate costs. The first is the lender's own charge: if you do not make the payment due by the agreed time and date, most payday lenders will charge you a late or missed payment fee⁸, and Citizens Advice confirms that charges will be added for late payment if there is not enough money in your account on the agreed date³. The second is your bank's: banks will charge a fee to cover payments where there is not enough money in your account⁸. A single missed payment can therefore cost you twice, once from each side.

How big these charges are varies by product. In its thematic review of consumer credit, the FCA found that for loans and point-of-sale finance, default fees were typically higher than for other products, around £25 for each fee⁷. On buy now pay later, late payments to Laybuy and Clearpay are penalised with extra fees¹³. The rules require these charges to be disclosed up front: FCA rules on deferred payment credit agreements require key product information to set out the circumstances in which charges for late or missed payment or underpayment will be applied, the amount of those charges, and the risk of an impaired credit rating²⁶.

That last point is the real danger. A missed payment does not just cost a fee; it can damage your credit rating, which affects the cost and availability of borrowing for years afterwards²⁶. Adverts for payday loans must carry the warning "Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk."³, and that warning applies to every kind of credit in practice. If a payment cannot be met, the steps in what to do if you can't repay a loan are a better route than missing the payment silently, and free debt advice is available before you pay any commercial service for help²⁷.

Secured or unsecured: how the costs and risks differ

Whether a loan is secured or unsecured changes both the fee structure and what happens when charges pile up. An unsecured loan is not tied to your home, and StepChange notes that unsecured loans are less risky than secured loans because you do not risk losing your home if you cannot make the repayments²⁸. Secured loans, including mortgages and second charge loans, are tied to property, which usually means longer terms, larger amounts and lower rates, but also arrangement and valuation fees on top, and much more serious consequences if payments fail.

The consequences of missed charges differ sharply between the two. On an unsecured debt consolidation loan, late payment fees could be added to the amount you owe and interest added will only increase the amount you owe; you may receive a default notice on your credit file and possible county court judgments²⁸. On a secured loan, the lender can ultimately repossess the property, which is why the Financial Ombudsman Service hears mortgage complaints about lenders who have applied unfair charges to accounts, such as arrears fees, legal costs and field agent visit fees, or who will not agree to a concession like a temporary switch to interest-only²⁹.

The comparison is not simply that unsecured is safer and therefore better. Secured borrowing typically offers lower interest rates and higher amounts, and for a homeowner the choice between the two is covered in secured or unsecured borrowing compared and homeowner loan vs remortgaging. What matters for fees is that a secured loan's charges come with a house attached: an early repayment charge on a mortgage can run to tens of thousands of pounds¹⁹, and arrears charges can accelerate toward repossession. The page on missing secured loan repayments and your home covers that ground directly.

Where fees sit outside the representative example

The representative example on an advert or product page is meant to show a typical cost, but it cannot always show your cost. Providers themselves flag this. Teachers Building Society states on its holiday let mortgage page that the representative example is for a house purchase only, and that for remortgage applications, certain fees do not apply³⁰. The example is a snapshot of one scenario, and the fees in your own illustration can differ depending on the type of application, the loan size and the term.

The same logic applies to the representative APR. Because it must be the rate offered to at least 51% of people but is not guaranteed⁵, nearly half of applicants can legitimately be offered a different, higher rate. Fees that are conditional, such as a broker's fee, a valuation fee or charges that only arise on certain application types, may not appear in the example at all. The FCA's rules on the total charge for credit require certain fees to be counted, including any fee payable to a mortgage intermediary for arranging the contract²², but this does not mean every possible charge is in the headline figure.

The practical protection is the documents you receive before signing. The pre-contract information and the loan illustration must set out the charges that apply to your specific loan, and the 14-day right to withdraw gives a short window to change your mind after signing. Reading the illustration against the advert is the only reliable way to see which fees have moved. Our page on credit broker fees and the APR covers the common case where a broker's fee appears in one figure but not the other.

Checking the costs before you sign and getting help

Before signing any loan, three checks catch most fee problems. First, read the total amount repayable, not just the monthly payment: the APR rolls in most fees¹⁴, and the total repayable figure shows the whole cost including interest. Second, look for charges that only trigger on events: early repayment charges⁶, late payment fees⁸ and broker fees¹² each appear in the small print rather than the headline. Third, check whether the representative example matches your situation, since some fees apply only to certain application types³⁰.

One warning deserves its own box, because it is the clearest scam signal in lending:

If loan charges are already a struggle, free help exists and comes before any paid service. nidirect's guidance on loan sharks is blunt: always get free, independent help before you pay a commercial service²⁷. Organisations can help set up an informal arrangement with lenders, but they may charge a fee, and their costs are worth confirming before they begin the work³¹. Free, impartial sources include StepChange, Citizens Advice and MoneyHelper, and the routes into them are set out in debt: a complete guide. Where borrowing is being considered as a way to deal with problem debt, consolidation loan or free debt advice compares the two paths.

Complaining about an unfair loan charge

If a loan charge looks wrong or unfair, the route is the same whatever the charge. First explain to your lender what you are unhappy about, and the reasons why. If you are not happy with their response, you can bring the complaint to the Financial Ombudsman Service with as much information as possible³². The Ombudsman handles the full range of consumer credit complaints, covering payday loans, the affordability of lending, being unhappy with the quality of goods bought or hired with credit, and other types of lending including mortgages³³. It also deals specifically with complaints from consumers who believe an early repayment charge is unfair²⁵, and with mortgage complaints about unfair arrears charges, legal costs and field agent visit fees²⁹.

The Ombudsman's powers are real and its redress can be substantial. Where it finds unfair or unauthorised fees by a credit broker, it will usually tell the credit broker to refund the fee, sometimes with interest, refund additional costs incurred, and pay compensation for distress or inconvenience¹². It may also ask a lender to pay compensation if it thinks you experienced distress or inconvenience³⁴. In published case studies this has meant practical outcomes: in one payday loan case the lender offered to refund the fees and charges from all of the borrower's subsequent loans, after the first ten³⁵, and in another the borrower sought a refund of the interest and charges, which had increased the cost of his loan³⁶. Consumers who feel they were given unaffordable credit, or that the lender acted irresponsibly, may be able to complain to the Financial Ombudsman Service³⁷.

Two variations on this route are worth knowing. Complaints about claims companies, including the fees they have charged, go to the Financial Ombudsman Service as well³⁸, and the Claims Management Ombudsman can look at unjustified or unclear fees, delays, incorrect claims advice and poor communication³⁹. In Northern Ireland, Consumerline can refer your complaint to the Trading Standards Service for investigation or the Financial Conduct Authority, which authorises lenders⁴⁰. The full process, including time limits and what evidence to gather, is set out in complaining about a lender or finance company and complaining about an unaffordable loan.