Often when people end up in my office to discuss filing bankruptcy, they’re shocked to discover their total debt is higher than they expected. The most common reason for this shock are the loan fees that increase the loan amount beyond what the person thought he or she was borrowing.
I most often see this with car loans and home refinance loans. Maybe the sticker price on that new-to-you car was $15,000, which seemed pretty reasonable for a nice car with low mileage that doesn’t burn a lot of gas. You felt like you were getting a good deal. But when all was said and done, in addition to that $15,000 for the car itself, you paid document fees, vehicle registration fees, title fees, emissions fees, license fees — maybe even an advertising fee, which basically means you paid the car dealer to convince you to come buy a car. One of the worst is the delivery/destination fee, where the dealer charges you for the cost of transporting the car from the factory to their lot. That is like paying the Gap for their cost of getting the jeans from San Francisco to your store in Cleveland, Ohio. That doesn’t sound very reasonable to me.
For home loans, many people are looking to refinance these days, especially with rates so low. You go into it thinking about all of the savings you will have, but the hidden fees can really diminish the savings you actually see each month. The fees may include attorney review fees ($500-$1000), appraisal fees ($400-700), application fees ($75-$300), inspection fees ($150-$350), and lastly, loan origination fees, which can be 1.5% of the loan principal ($3,750 on a $250k home). The lender doesn’t negotiate these with you or let you pick and choose. The fees are all just added in to your refinance. The savings you thought you were getting can decrease quickly.
All of these loan fees typically are added to your loan amount, in turn driving up your monthly payment. Fees have to be disclosed in your loan documents before you sign them, but the unfortunate truth is that many people don’t read those documents carefully. They only look at the bottom line and whether they can afford the monthly payment.
Adding these fees to your loan amount can affect the amount of equity you have in your house or your car. Equity is whatever value is left over on your home or car after you subtract the amount you owe, and can affect your ability to trade in your car or sell your house later. If you have little or no equity, you may find yourself having to pay off a loan balance not covered by your trade-in or contract price on your home sale, which in turn increases the amount you’re out of pocket on your next car or home purchase or drives up what you pay per month for that new car or house.