What is a personal loan origination fee, and can I avoid it?

Posted 04.07.2023

What is a personal loan origination fee, and can I avoid it?

When you apply for a loan, an origination fee is charged by lenders for processing your application. Gaining insight into what is a personal loan origination fee helps you understand how it shapes your loan and if it’s worth the cost.

So, make sure you know how this fee impacts your payments whether your personal loan is for renovating a home, consolidating debts, or funding expenses. To help you make the smartest choice, we dig into what origination fees are and how they are determined.

What is a personal loan origination fee?

Lenders charge a loan origination fee when you apply for a personal loan. The origination fee covers expenses linked to your loan application, such as application evaluation, creditworthiness verification, to loan funding.

These fees make sure that lenders can provide you with the necessary services and resources throughout the loan process. The origination fee is commonly deducted from your loan amount. Meaning you’ll receive less money upfront. In some cases, you may also include the fee in your loan balance.

Typically, this amounts to a percentage of your loan, which is usually 1% to 8% or even up to 10%. But sometimes, it can also be a flat fee. For example, if you apply for a $5000 personal loan with a 5% origination fee, this means your origination fee is $250. So, rather than receiving $5000, you get $4750.

Personal loan origination fee costs

As mentioned earlier, lenders usually deduct the origination fee from your loan amount. But remember that you make repayments on your original loan.

Scenario #1

Say you need $9,000 for your family vacation, so you take out a $10,000 personal loan to fund it. If your origination fee is 6%, you won’t receive the full $10,000 – you only get $9,400. Nonetheless, you make your monthly payments on the $10,000 loan balance rather than the $9,400.

Scenario #2

You need exactly $5,500 to consolidate your debts. If your lender charges you a 5% origination fee, you need to apply for a $5,790 loan. This way, you have $5,500, but you make payments on the $5,790 balance.

How are loan origination fees determined?

Your origination fee depends on different factors, such as your credit score, financial situation, and type of loan.

Your credit score

Your credit score has a vital role in the origination fee you may receive. This means a higher credit score may result in a lower origination fee, while a lower score may lead to a higher one. Say your credit score is 820, which is excellent, lenders may offer you a 1% origination fee or even no fee at all.

Your financial situation

Lenders also assess your financial situation, including your income and employment. If you show you don’t have a problem repaying your loan, lenders may adjust your fee. So, you may qualify for a lower origination fee if you have a stable income and employment. Otherwise, you may need to pay higher.

Loan type

The type of your loan may affect your origination fee as well. Secured loans, for instance, may have lower fees compared to unsecured loans. Since secured loans require collateral, they are less risky than unsecured ones.

Are origination fees worth the cost?

Though origination fees may add to your loan, sometimes, they can be worth it. So, you shouldn’t immediately turn your back on a personal loan with an origination fee.

Case in point: when it has a cheaper annual percentage rate (APR) than the alternatives. APR shows the total cost of your loan, taking into account other fees. If your loan has a low APR with an origination fee, it may be worth it to consider this option.

Let’s compare these three $20,000 loans with a 36-month term from different lenders:

	Lender 1	Lender 2	Lender 3
Interest rate	11%	9%	12%
Origination fee	5%	4%	0%
Total interest	$3,571.88	$2,895.81	$3,914.30
APR	14.41%	11.70%	12%

Notice how the second lender has a 4% origination fee while the third doesn’t have any fees. But since the APR and the overall interest of Lender 2 are lower than Lender 3, it becomes the cheapest option among the three.

In this case, paying the 4% origination fee is worth it since you may save more on the total interest paid. It’s important to pay attention to how much the overall loan will cost you. This, in turn, lets you know whether or not the extra fees are worth the penny.

How to compare loans with origination fees?

Learning how different factors affect your personal loan helps you effectively compare your choices.

Annual percentage rate: Your APR shows the total cost of your loan. Your loan is basically cheaper with a lower APR. So, try to compare APRs from different lenders before deciding.
Minimum and maximum loan amounts: Aside from the APR, check the lowest and highest amounts you can borrow. This way, you can find the offer that matches your needs.
Other fees: Then, personal loans may also come with extra costs and upfront fees, such as late payment fees. These charges can add up, so pay attention to how much they may cost you.
Loan term: The duration of your loan payments also affects your overall loan. Longer loan terms have cheaper monthly payments, but the total interest is high. On the flip side, shorter loan terms have higher payments but lower interest in total. So, find a loan term that balances your situation and needs.

Other personal loan fees

Aside from origination fees, there are other extra fees you need to be aware of before applying for a personal loan.

Late payment fees

Late payment fees come into play if you miss or make a late payment. Depending on your lender, it may be a flat rate or a percentage of your balance. Late payment fees can be around $25 to $50 or 3% to 5% of your monthly payment.

Prepayment penalties

In some cases, you may need to pay prepayment penalties when you pay off your loan earlier. Paying your loan before the term ends means you save on interest. So, this fee covers the loss your lender incurs. These penalties are quite rare in terms of personal loans.

Application fees

Also uncommon in personal loans, lenders may charge you an application fee when you apply for a personal loan. If your lender charges you this fee, it’s usually nonrefundable and paid at the beginning of your application.

In summary

Having a clear idea of personal loan origination fees helps you weigh if they work in your favor. When you compare personal loans, it pays to look beyond the origination fee – consider other aspects as well. This way, you efficiently compare your choices and find the loan that can save you the most and suit you the best.

Frequently asked questions

Do I pay back origination fee?

Usually, a personal loan origination fee is an upfront fee that lenders charge on your loan proceeds. So, you don’t receive the total loan you apply for. Sometimes, lenders may also add the fee to your loan balance.

Why am I being charged a loan origination fee?

Lenders charge origination fees for processing your loan. Think of it as a payment for their initial service. This fee considers everything involved in your application process – from processing your application to funding the loan.

How do I avoid loan origination fees?

One way to avoid paying loan origination fees is to find lenders that don’t charge them. For example, some banks and credit unions don’t charge origination fees on personal loans. You may also potentially avoid origination fees if you have excellent credit history and financial situation.

Can I negotiate the origination fee?

More often than not, personal loan origination fees are not negotiable when lenders charge them. But it won’t hurt to try talking with different lenders. Mortgage origination fees, however, are negotiable.

Is loan origination fee the same as interest?

No. The loan’s origination fee is an additional cost that accounts for processing your loan application. On the other hand, your loan’s interest rate shows the cost that lenders charge you when you borrow money or credit.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.