Key takeaways:
- You might come across an origination fee as a charge for your lender’s services when taking out a personal loan.
- A loan origination fee could be lower if you have a strong credit score or a co-signer when you apply.
- Choosing a loan with an origination fee and lower interest rates could save you more in the long run compared to a loan with no origination fee and higher interest rates. Compare many offers before deciding on one.
If you’re considering a personal loan, it’s worth knowing what an origination fee is. Some lenders charge this one-time fee to cover administrative costs when consumers borrow. But don’t let that discourage you from following through with a particular loan offer.
Paying an origination fee once could gain you access to a loan with better terms and save you money in the long run. It all depends on where you inquire, your financial standing, and the type of loan terms you’re looking for.
Read our guide to understand what exactly a loan origination fee is and how to shop around to decide if it’s worth it.
What is a loan origination fee?
When you take out a loan, sometimes you need to pay more aside from principal and interest. A loan origination fee is a one-time, upfront charge some lenders require when borrowers take out a personal loan, auto loan, or mortgage. You might also hear it referred to as a processing, administrative, or underwriting fee.
For lenders, it covers various expenses associated with offering loans. This type of fee could include the cost of processing your application, running a credit check, underwriting, funding, and other administrative services.
An origination fee usually reduces the loan amount you receive and can be included in the loan’s annual percentage rate (APR). The cost could be worth it if the loan has a longer repayment period or if the APR is lower than other options.
How much is a personal loan origination fee?
Some lenders have a flat loan origination fee. Others take a percentage range of your total loan amount calculated on certain factors. Fees typically range from 1%–8% of the total loan amount. This depends on the lender, along with your credit score and the length of the loan.
Keep in mind, however, the higher the origination fee, the less loan money you’ll have available to you. Since an origination fee could add hundreds of dollars in extra costs, it’s subtracted from the total amount of the loan.
Example of paying an origination fee on a personal loan: Say you take out a $20,000 personal loan with a 3% origination fee. In this case, your charge would be $600. This means you’d only get $19,400 and still pay interest on the entire total of $20,000. If you needed to borrow the full $20,000, you’d have to borrow more to account for the fee.
How to pay a loan origination fee
There are 3 ways you can pay an origination fee on a new personal loan:
- Deduct it from your loan amount. This standard way of paying a lender an origination fee gives you a smaller loan amount when you receive your funds. However, you’re still responsible for paying back the full amount over time.
- Pay it back over time. In some cases, lenders allow you to roll the fee into the principal balance of your loan instead of deducting it from your total disbursement. This means you’d pay interest on the fee over the life of your loan as well.
- Pay the fee upfront. Some lenders may let you pay your loan origination fee out of pocket.
How a loan origination fee gets determined
The criteria for an origination fee may vary when a lender considers your loan application. However, a personal loan origination fee is usually determined by the following factors:
Credit scores and history
Personal loans are often unsecured loans that don’t require collateral. Approval is primarily based on your creditworthiness. Having a good credit score can make it easier to get approved for a personal loan and get a lower origination fee. Otherwise, with a poor credit score or a high debt-to-income ratio, you might receive loan offers with high origination fees.
Loan amount requested
The size of your loan can impact the interest rate and origination fee offered. Because this type of fee is sometimes based on a percentage of the loan total, a higher loan amount usually means a higher origination fee. Borrowing more than you need can also lead to paying more in fees than you may want.
Time span of the loan
How long you have to repay your loan influences the loan interest rate and origination fee. For instance, a shorter term may cost you fewer fees overall, but your monthly payment could be higher. Paying an origination fee on top of high monthly payments might not be worth it.
Co-signer on your loan application
Adding a co-signer might help you get the loan you need with better terms. Using another person’s income and good credit history on the application may increase your chances of a lower origination fee.
Is paying an origination fee worth it?
Avoiding an origination fee on your loan means more of the loan total will be accessible to you. Remember, an origination fee is subtracted from the loan total upfront. However, an origination fee isn’t a bad thing to pay in all cases.
Paying this fee could be worth it if you can get a better interest rate from the lender. On the other hand, a lender that charges more interest over time can leave you paying more over the life of the loan than compared to the origination fee.
Comparing loans with an origination fee
Finding an affordable loan requires research and consideration of your financial situation. Consider how these ways can factor into your comparisons:
- Look at the APR. The APR on a loan is based on the interest rate and includes other financed charges, including origination fees. Don’t add the origination fee on top of the APR when figuring out the total cost of paying off the loan. You could be estimating that you’ll pay much higher than necessary.
- Consider the duration of your loan. An origination fee is typically paid upfront by taking from your total loan funds. However, a longer repayment term can mean you’re paying more over the life of your loan, even with similar APRs. For example, if you plan to repay the loan amount over 5 years and have a $500 origination fee, you can think of it as paying $100 per year. If your loan term is only 2 years, then you can consider the origination fee costing $250 per year.
- Shop offers from multiple lenders. It’s crucial to make sure that you’re getting the best rate available for any type of loan. Get multiple quotes from different lenders and ask if your loan will require an origination fee. Be sure to compare loans with and without origination fees by having lenders run a soft credit check.
Pro tip: Consider checking your rates through an online lending marketplace like Upstart. Our model can help you prequalify without a hard credit check. We also look beyond your credit score to help you find a personal loan that works best with your finances.
How to avoid loan origination fees
This type of fee isn’t generally negotiable on a loan. There are a couple of ways to possibly avoid origination fees:
- Working with a lender that has personal loans with no origination fee. Speak to many lenders and get estimates from each of them.
- Asking for the fee to be waived. This might be possible if you agree to pay a higher interest rate or are able to show a better offer from another lender.
Though you may not be able to avoid a loan origination fee, you could lower it by improving your credit before applying. Having good to excellent credit beforehand could help you receive the best loan terms overall.
Remember, if a lender doesn’t charge this extra fee, they might have other additional costs, higher interest rates, or different eligibility requirements. Accepting a trade-off by opting for a higher interest rate may be worth it if the origination fee is lower or eliminated and the numbers line up with your budget.
Choosing the loan right for you
Choosing a personal loan that works with your financial goals is an important decision. A personal loan that comes with an origination fee might not be ideal, but it could work best for you in certain situations.
Before deciding on a personal loan, gather numerous offers and compare the APR, repayment terms, and any restrictions on loan proceeds. Remember, while loan origination fees add to costs, it may be worth paying if the APR is the lowest among other options. Once you see the numbers you have available to you, you can make sure you’re getting the best offer for your specific needs. If you decide you’re ready, getting a personal loan through Upstart could help start your financial journey.
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