Understanding Personal Loan Origination Fees: Is It Worth Paying?

If you’re considering taking out a personal loan, you may come across a loan origination fee. It’s an upfront charge that some lenders require when borrowers take out a personal loan, auto loan, or mortgage. While it may seem like an unnecessary expense, paying an origination fee could gain you access to a loan with better terms and save you money in the long run. In this article, we’ll explore what exactly a personal loan origination fee is and whether it’s worth paying.

What Is a Personal Loan Origination Fee?

A loan origination fee is a one-time charge that some lenders require when borrowers take out a personal loan. It’s an upfront cost that covers various expenses associated with offering loans, such as processing your application, running a credit check, underwriting, funding, and other administrative services. You might also hear it referred to as a processing, administrative, or underwriting fee.

How Much Is a Personal Loan Origination Fee?

The amount of an origination fee can vary depending on the lender, your credit score, and the length of the loan. Some lenders have a flat loan origination fee, while others take a percentage range of your total loan amount calculated on certain factors. Fees typically range from 1% to 8% of the total loan amount. Keep in mind, however, that the higher the origination fee, the less loan money you’ll have available to you.

Suppose you take out a personal loan of $15,000 with an origination fee of 5%. In this case, the fee would amount to $750, and you would receive only $14,250. You would still be responsible for paying interest on the full $15,000 loan amount. If you need the full loan amount, you would have to borrow additional funds to cover the fee.

How to Pay a Loan Origination Fee

There are three ways to pay an origination fee on a new personal loan:

  1. 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.
  2. 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.
  3. Pay the fee upfront. Some lenders may let you pay your loan origination fee out of pocket.

How Is a Loan Origination Fee 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:

  1. Credit scores and history. Approval for personal loans 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.
  2. 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.
  3. Time span of the loan. How long you have to repay your loan influences the loan interest rate and origination fee. 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.
  4. 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?

While paying an origination fee may seem like an unnecessary expense, it 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 requires research and consideration of your financial situation.

When comparing loans, consider looking 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.

Also, 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.

Shopping offers from multiple lenders is 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.

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:

  1. Working with a lender that has personal loans with no origination fee. Speak to many lenders and get estimates from each of them.
  2. 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.

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.

Photo by Annika Wischnewsky on Unsplash

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