An origination fee is an upfront fee a personal loan company may charge to cover the cost of processing your loan. It might be called an underwriting, administrative or processing fee. This fee is also common on mortgages and federal student loans.
When shopping for loans, it’s important to compare origination fees and how they add to the overall cost of the loan.
Here’s more information on personal loan origination fees, what they mean in terms of cost and when it makes sense to pay the fee.
How much is a personal loan origination fee?
Personal loan origination fees are one-time costs that you typically pay when you receive the loan, although some lenders add the fee to the balance.
Origination fees typically range from 1% to 8% of the loan amount.
Origination fees typically range from 1% to 8% of the loan amount. Factors determining the fee you receive include your credit score, the loan amount and repayment term.
The fee is accounted for in the loan’s annual percentage rate, which represents the true annual cost of borrowing when factoring in the interest rate and upfront fees.
“It’s important for borrowers to understand the difference between the interest rate versus APR,” says Abhinav Anand, head of consumer lending at Marcus by Goldman Sachs, an online lender that doesn’t charge any fees with its personal loans.
Most lenders that charge the fee deduct it from the loan proceeds. If you need your loan to be a specific amount and the fee is deducted from your loan proceeds, then you’ll need to request a higher loan amount, which will carry a higher fee as well.
For example, if you needed $20,000 to consolidate debt and the loan carried an origination fee of 5%, you’d have to request $21,053 to get the full amount. You would make payments on the $21,053 balance, not the $20,000 you’d receive.
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Should I pay an origination fee?
While an origination fee adds to the cost of a loan, it may be worth paying if the loan’s APR, with the fee included, is lower than the APRs on other loan options. In other words, don’t choose a loan with no origination fee if it has a higher APR than other personal loans you’re considering.
The fee may be worth paying if the loan’s APR is lower than the APRs on other loan options.
And while mortgage origination fees may be negotiable, this likely isn’t the case with personal loans.
Direct lenders such as banks and credit unions typically don’t charge origination fees, making a profit off the interest rate instead, says Hersh Agarwal, strategic partnerships lead at Upstart, an online lending marketplace.
Lending platforms, such as Upstart, that fund loans from investors are more likely to charge the fee.
“Origination fees are the only source of revenue we have,” Agarwal says. “We charge it to cover all of our loan operation costs, including marketing costs and processing applications.”
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Other personal loan factors to consider
- Watch out for look-alike fees. The lender may charge a fee that’s similar to an origination fee, such as an application, processing or administrative fee. All fees are required to be disclosed under the Truth in Lending Act.
- Fixed vs. variable rate loans. The lender must disclose whether the loan’s interest rate is fixed or variable, meaning it can change over time based on market rates. Go with a fixed-rate personal loan if you don’t want your payments to change.
- Shop around to get the best deal. Compare fees, APRs, funding speed and consumer-friendly features, such as flexible payment options. Most online lenders let you pre-qualify to check your rate and terms with no impact to your credit score.