Personal loans can be an excellent tool to help you consolidate debt, make a large purchase, manage a financial emergency, and more.
But depending on the lender you choose, your costs may not be limited to the principal and interest on the loan.
Even some of the best personal loan lenders charge fees on their personal loans, including origination fees.
What Is a Loan Origination Fee on a Personal Loan?
A loan origination fee is an upfront fee that’s charged on a personal loan. This fee is designed to help cover the lender’s administrative costs for underwriting and processing the loan.
Cost
Origination fees are usually charged as a percentage of the loan amount rather than being a flat fee.
- Example: For a loan of $10,000 and an origination fee of 4%, the origination fee would amount to $400.
How They Are Paid
Origination fees can be charged in a couple of different ways. First, lenders might charge this fee upfront. Either the lender can pay it when they close on the loan, or it can simply be subtracted from the loan amount.
- Example: For a loan of $10,000 with an origination fee of $400, the borrower would receive $9,600 in loan proceeds.
Alternatively, the origination fee can be added to the loan amount and financed over the entire loan term.
- Example: For a loan amount of $10,000 and an origination fee of $400, you would actually have a loan balance of $10,400, all of which would accrue interest.
Compare personal loans and origination fees.
How Loan Origination Fees Are Determined
Lenders that charge origination fees usually don’t have a flat fee that applies to everyone. Instead, they have a range, and all borrowers will end up with a fee within that range. For example, a lender might charge originations ranging from 2% to 6% of the loan amount. The following factors might affect the fee a borrower is assigned.
Credit score
You should know your credit score. A borrower with a lower credit score presents a higher risk to the lender. As a result, a good credit score can help you lower your origination fee.
Loan amount
An origination fee is usually charged as a percentage of the loan amount, so the larger the loan, the higher the origination fee you’ll pay.
Debt-to-income ratio (DTI)
Like your credit score, your income and liabilities are other indicators of risk. As a result, borrowers with a high DTI may end up with a higher origination fee.
Loan term
Lenders offer borrowers a range of loan terms. The loan term you choose may impact the origination fee your lender applies to your loan.
Personal Loans Without Origination Fees
Personal loan origination fees are fairly common, but not all lenders charge them. In fact, there are many online lenders that offer personal loans without origination fees and other fees. A personal loan without an origination fee can save you money either upfront or over the entire loan term, depending on how the fee is charged on your loan.
Of course, just because a loan doesn’t have an origination fee doesn’t mean it’s more affordable. A lender might offer a personal loan without an origination fee but then charge a higher interest rate than its competitors. As a result, you would actually end up paying more over the long run rather than less.
Ultimately, the origination fee is just one of the factors that determine the cost of the loan. Rather than assuming a loan with no origination fee is a better deal, consider it as just one of several factors that can help you decide which loan is right for you.
Should You Choose a Loan With an Origination Fee?
An origination fee can add hundreds — or even thousands — of dollars to the cost of your personal loan. And for borrowers who are already in a difficult financial spot, this added cost can be difficult to manage.
The good news is that origination fees are fairly easy to avoid. Plenty of lenders now offer personal loans and other types of loans without origination fees, which can lower your overall costs.
But as we mentioned, an origination fee shouldn’t necessarily be a deal breaker. When you balance it with other factors, you could end up paying more overall in interest and other fees in the interest of avoiding an origination fee. Rather than looking at only the origination fee, make sure to also consider these other factors.
Interest rate
Rather than the origination fee, it’s actually the personal loan interest rate that’s going to have the biggest impact on the cost of your loan. The higher your interest rate, the more your loan will cost. Generally speaking, the best interest rates are available to borrowers with good or excellent credit.
Loan term
It can be appealing to choose the longest loan term to land a lower monthly payment. But that lower monthly payment also comes with disadvantages. The longer your loan term, the more time you’ll have for interest to accrue, which ultimately means you’re paying more for the loan over the long run.
Other fees
The origination fee is just one of several fees that lenders may charge on personal loans. Other fees may include an application fee, late fees, prepayment penalties, annual fees, and more. It’s important to consider all of the fees that lenders charge to determine which is actually the most cost-effective.
Don’t Look at Just Origination Fees When Choosing a Personal Loan
In addition to looking at the cost of each loan, it’s important to look at other loan features to ensure you find a personal loan that meets your needs. For example, pay attention to each lender’s loan amounts, which can span from just a couple thousand dollars to $100,000.
It’s also important to consider how quickly a lender will fund the loan. Some lenders may take weeks to make a decision and deposit the money in your account, while others do so in as little as a day or two.
Ultimately, the best way to choose a personal loan is to shop around, get quotes from multiple lenders, and make sure you have all the information you need to make a decision.
Frequently Asked Questions
What is the purpose of the loan origination fee?
A personal loan origination fee helps to cover the lender’s administrative, underwriting, and processing expenses.
How much is a personal loan origination fee?
Origination fees generally range from 1% to 8%, but the fee you’ll pay will depend on your lender, credit score, loan amount, and other factors.
Do all personal loans have origination fees?
No, not all personal loans have origination fees. Origination fees are common on personal loans, but there are plenty of lenders that offer loans without them.
Can origination fees be negotiated?
Whether an origination fee is negotiable depends on the lender. If you’re applying for a personal loan, it may be worth asking to have your origination fee lowered or waived. Lenders may be more likely to negotiate this fee for borrowers with good credit.
