Do I pay interest on fees added to the loan?

2 min read

Capitalised = chargedInterest on the fee too

Up front = cheaperNo interest on it

Cash-flow tradeEase now, cost later

Check the totalCompare both ways

What capitalising a fee means

Lenders often let you 'capitalise' fees — add the arrangement, documentation or other charges to the loan balance instead of paying them at drawdown. It is convenient: you keep your cash and the fee disappears into the monthly payment. The catch is that the fee now sits inside the balance the interest is charged on, so you pay interest on the fee, every month, for the whole term.

The cost of convenience

On a small fee over a short term the extra interest is negligible. On a larger fee over five years it adds up. A £2,000 fee capitalised at a typical business rate over five years can cost several hundred pounds more than paying it up front. Whether that is worth it depends purely on how much you value the cash today versus the extra cost tomorrow.

Deciding which way to pay

If you can comfortably pay the fee up front without straining cash flow, doing so is the cheaper choice — no interest accrues on it. If paying it up front would leave you short at exactly the moment you are borrowing to shore up cash, capitalising it may be the sensible call despite the extra cost. Run both versions and see the difference in pounds before deciding.

Compare paid-up-front against capitalised on the repayment calculator, and see all the fees. When you have decided, apply.

Frequently asked questions

Is it always cheaper to pay fees up front?

In pure cost terms, yes — paying a fee up front means no interest accrues on it. But 'cheaper' and 'right' are not always the same. If paying up front drains the cash the loan was meant to protect, capitalising the fee can be the better cash-flow decision even though it costs a little more overall. Judge it against your near-term liquidity.

Does capitalising a fee change my monthly payment?

Yes — adding the fee to the balance raises the amount you are repaying, so the monthly payment is slightly higher than it would be on the loan alone. It is a small increase spread over the term rather than one lump at the start. Model it so there are no surprises on the first collection.