At a Glance
When looking at different personal loan offerings, it’s important to know all the costs that go into your final bottom line number. Depending on the lender you wish to borrow from for the personal loan, you may notice information regarding an origination fee being charged. Understanding what this fee is and whether it’s worth the cost will help you make a more informed borrowing decision.
What is a loan origination fee?
In short, a personal loan origination fee is a percentage charged by the lender to cover a loan processing fee and fees associated with paying out the funds. Most lenders will charge a percentage of the total loan to determine the origination fee, with 1-8% being a common figure. However, in rarer cases, lenders may charge a flat rate for the origination fee.
It’s worth noting that an origination fee is almost always automatically deducted from the loans total requested amount, rather than paid up front. Therefore, you may need to request more from the lender to meet your original amount desired. For example, say you are seeking $8,000 and the lender has an established 6% loan origination fee. To determine how much, you should request to get the full $8,000:
- Divide $8,000 by 94% or .94
- $8,511 is the total amount you should request to account for the origination fee
How personal loan origination fee works?
Understanding how to calculate your loan origination fee is only half the battle. It’s equally important to understand how this fee works and the different factors that a lender considers when setting this fee.
Origination fees are charges assessed by lenders when personal loans are issued. The fee is assessed as a percentage of the total loan amount, and it is paid upfront when the loan is disbursed.
Personal loans typically have origination fees ranging from 1% to 8%. For example, if you take out a personal loan for $10,000 with a 5% origination fee, you would be charged $500 upfront. The remaining $9,500 would be dispersed to you in a lump sum. Origination fees are used to offset the costs associated with processing and issuing personal loans. These include costs such as credit checks, verification of employment and income, and the preparation of loan documents. In some cases, origination fees may also be used to cover the cost of marketing personal loans to potential borrowers.
Lenders typically recoup their losses on personal loans through interest payments made by borrowers over the life of the loan. As such, personal loans with higher origination fees often have lower interest rates than those with lower origination fees.
What does the origination fee consist of?
As mentioned, origination fee personal loan amounts will typically be a flat rate determined by several factors. The length of your loan, gross loan amount, credit score and history, any potential co-signers, reasons for borrowing, and other information on your application can all impact the loan origination fee.
When do you pay the origination fee?
In most cases, the origination fee is already factored into the loan amount, so technically you will start to pay the origination fee from the moment the funds are disbursed. Therefore it’s important to request more than you were anticipating to account for the removal of the origination fee.
How do you pay the origination fee?
As the origination fee is wrapped into the total amount for the loan, you will pay it back slowly over time. Using the example from above, the lender will give you $8,000 but you will have paid by $8,511 by the end of your loan term not including any interest.
How much is a personal loan origination fee?
In general, it’s not unusual for lenders to charge between 1-8% for a loan origination fee depending on some of the factors above. Remember that the question of what is a loan origination fee total will change depending on the factors of your application. Additionally, if the lender takes the origination fee out of the loan principal, you will need to request more funds initially to receive your desired amount.
How origination fees are determined?
While there are several factors listed above the determine your loan origination fee, there are three primary factors above:
- Your credit worthiness
- The requested loan principal
- Tenor of the loan
Assuming you have a stronger credit score, a lender may feel comfortable charging you less of an upfront fee for loans. Additionally, borrowing large amounts of money will naturally incur a higher origination fee given it is a percentage of the total amount. Finally, the length of repayment time chosen for your loan can have a monetary impact.
Is personal loan origination fee worth the cost?
Depending on your personal financial situation, a loan origination fee may be worth the cost. Consider the annual percentage rate or APR you are being offered and remember that the origination fee is already included, don’t add the origination fee on top of this value. Also, consider the length of your loan. For a three-year loan with a $600 origination fee, you are effectively paying $200 per year. However, if your loan tenor is six years, then you are only paying $100 per year which can seem more reasonable.
Other personal loan factors to be considered
Beyond some of the above highlighted characteristics of personal loan origination fees, consider some of the following:
- Identify all fees: Legally, all fees associated with a loan need to be disclosed. Some lenders, however, will charge administrative and processing fees on top of origination fees, which can get expensive quickly.
- Rate type: Find out whether the lender is offering you a fixed or variable loan rate, which will determine whether your monthly payments change or not.
- Don’t settle on the first lender you find: Find a lender who charges an origination fee that you are comfortable paying, rather than settling on the first loan offering that is thrown your way.
Evaluate your own personal financial situation to determine whether you should pay the loan origination fee. A high percentage fee coupled with a short loan tenor is usually not the best combination. However, if the percentage and tenor are reasonable in comparison to how much you wish to borrow, paying a loan origination fee may be worth the cost.
In some cases, lenders may be willing to negotiate the APR they are offering you, but the origination fee is typically fixed and not negotiable.
To lower your potential origination fee, focus on improving your credit score or requesting to borrow fewer funds. Given that an origination fee is typically a percentage of the loans gross total, you will be charged more if you borrow more. Additionally, lenders will be inclined to charge a higher origination fee if you have a lower credit score as you are perceived as a riskier borrower.
No, not all lenders charge origination fees. In fact, it has become more and more common for lenders to not charge an origination fee at all, which is why shopping around for the best personal loan is so important.
Typically, these two types of fees are the same and the term is used interchangeably. Be sure that the lender is not charging you two different fees and using the term upfront fee to make you think it’s just the origination fee.