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What is an origination fee on a personal loan?

Yahoo Personal Finance· Getty Images
5 min read

When you apply for a personal loan, you could encounter expenses beyond the money you’re borrowing and interest payments.

Personal loans can come with origination fees — one-time, upfront costs for processing a loan. Not all lenders charge these fees, so it’s possible to avoid them. But if you’re considering a personal loan with origination charges, here’s what you need to know.

An origination fee, sometimes known as a processing fee, underwriting fee, or sign-up fee, is usually listed as a percentage of the total loan amount. It covers loan administrative tasks — like processing your application, reviewing your credit history, and dispersing loan funds. In most cases, the fee is deducted from the total loan amount before you get the funds.

You could encounter them when you apply for different types of loans. Personal loan lenders may charge this upfront fee when you take out a new loan or refinance debt. Mortgage lenders may charge them on a home loan.

If a lender charges an origination fee, you’ll likely find it near the annual percentage rate or APR on the lender’s website. APR is the interest rate plus any loan fees you’ll pay throughout the life of the loan.

Personal loan origination fees can range from 1% to 6%, but some lenders may charge closer to 10%. How much you’re charged depends on several factors, like loan size, credit score, credit history, and repayment terms.

If you’re applying with poor credit, for example, you may face higher origination fees since the lender may view it as a riskier loan.

Let’s say you take out a personal loan for $10,000. If the lender charges a 3% origination fee, $300 will cover this fee. You’ll receive $9,700. To walk away with the full $10,000, you’d have to borrow a slightly larger principal amount.

Remember this advice from the Consumer Financial Protection Bureau: Before you sign a loan contract, you should always check the required loan disclosures and loan documents provided by the lender to understand any fees you may be charged.

You can save on origination fees by shopping around for lenders with low or no fees and keeping a healthy credit profile. Lenders are generally willing to reduce fees for less risky loans. For example, you may see a lower fee for a smaller loan amount or shorter repayment term. Applying with a co-applicant also reduces a lender’s risk and can result in a lower fee.

Keep in mind that origination fees are one of many costs to consider when shopping for a personal loan. Understanding interest rates, closing costs and other fees lenders may charge will help you make the best decision for your personal finances.

If you’re shopping around and comparing loan estimates, you can take these steps to make sure you’re getting the best loan offer.

Prequalify with multiple lenders. Many lenders allow you to prequalify for a personalized interest rate. This is a quick way to see rates and fees across several lenders. Look for lenders offering the lowest APR. With most lenders, prequalifying will trigger a soft credit check but will not impact your credit score.

Check repayment terms. How long you have to repay the loan can vary by lender. Shorter repayment terms will save you more money since you’re paying less interest. But you’ll also have a higher monthly payment. A longer repayment term can lower your monthly payment, but you’ll pay more in interest throughout the life of the loan.

Look for rate discounts. Lenders may offer a lower interest rate if you make automatic payments or sign up for a checking account with direct deposit, for example. Rate discounts can lower the overall cost of your loan, even if you have to pay an origination fee.

Assess additional fees. Other fees can add to your personal loan costs. Some lenders charge an application fee or fees for late payments or insufficient funds. You may even encounter a penalty for paying off your loan early. Make sure you understand all costs that could come with the loan so you can make an informed decision.

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Do all personal loans have an origination fee?

Not all personal loans have origination charges. Though avoiding these fees is possible, it’s not always necessary. Ideally, you want to minimize total costs over the life of the loan. That means before filling out any loan applications, compare interest rates, discounts and all fees to find the loan offer that fits your budget.

Should you pay an origination fee on a personal loan?

It’s best to avoid personal loans that are too costly — whether the costs are origination fees, interest rates or repayment terms that don’t work for you. Looking at the total cost of a loan will help you decide if it’s worth paying the origination fee. A high fee, like 10%, may be best to walk away from. But paying a lower origination fee could make sense if the other loan terms are favorable, like a low interest rate and flexible repayment periods. Paying a higher interest rate will cost more long term than a low-rate loan that comes with an origination fee.

Can you negotiate an origination fee?

A homebuyer may negotiate mortgage origination fees, but this is less common with origination fees for personal loans. You may be able to opt for a lower fee by selecting different loan terms, like a shorter repayment period. A lender may also lower or remove an origination fee if you apply with a co-borrower who will share responsibility for the loan. In general, whatever you can do to reduce the lender’s risk could result in a lower origination fee.

How do you pay a personal loan origination fee?

Origination fees on personal loans are one-time costs usually taken out of the loan amount before the funds are deposited into your account. For example, a 1% origination fee on a $2,000 loan means you’ll receive $1,980 when your loan funds are dispersed.