When you take out a loan, your lender charges interest for the privilege of borrowing. The higher your interest rate, the higher your costs over the life of the loan. The lower your rate, the less you pay.
But some types of loans also have fees added on top of interest. With mortgages and personal loans, for example, you’re likely to see origination fees.
Here’s what to know about origination fees, how they work, what they cost, and more.
An origination fee, sometimes known as an application, sign-up, or administration fee, is an up-front cost to borrowing that’s typically structured as a percentage of your total loan. This fee covers administrative tasks, such as processing your loan application, reviewing your credit history, and sending the money.
It’s not uncommon to see origination fees on personal loans, but it’s possible to find lenders that don’t charge them. You’ll have a better shot of avoiding origination fees if you have good credit.
Personal loan lenders typically deduct your origination fee from your loan amount before they send you the money. If you borrow a $20,000 personal loan with a 9% origination fee, for example, you’d only receive $18,200 in your account — or $20,000 minus the $1,800 fee.
However, you’re still required to repay the full $20,000 detailed in your loan agreement, and you’ll be charged interest on that entire amount.
It’s also important to factor in potential origination fees when you select your personal loan amount. If you needed the full $20,000 to cover a cost, for example, you’d want to request about $22,000 so you’re left with enough cash after the origination fee is subtracted.
Personal loan origination fees often range from 1% to 8% of the borrowed amount, but could be as high as 10% or more. While some lenders may charge a set fee for every borrower, most consider several factors when determining your origination fee — including your loan size, credit score, credit history, and repayment terms.
If your credit isn’t great due to past missed or late payments, for example, you could face higher origination fees since a lender may view you as more likely to default. Thus, they may want to offset some of their risk by charging you a higher fee.
Two important steps could help you save on origination fees:
-
Shopping around for a personal loan
-
Maintaining a good credit profile
Since these fees vary by lender, taking the time to compare loan options could help you save significant cash. Many lenders let you prequalify for a personal loan with a soft credit check, which won’t impact your credit score. Taking this step could give you more insight into an estimated loan amount, term, rate, and any potential fees — including an origination fee.
Lenders are generally willing to waive or reduce fees for less risky loans. You may see a lower fee if you borrow a smaller amount or opt for a shorter repayment term, for example, because a lender deems those loans as safer bets. Applying with a co-signer with strong credit may also increase your likelihood of approval and could result in a lower fee.
Keep in mind that origination fees are only one cost to consider when shopping for a personal loan. Understanding interest rates, prepayment penalties, and other fees lenders may charge will help you choose the best loan option.
Comparison shopping is key to finding the best personal loan. Here are some steps to take:
-
Research potential lenders: Research lenders offering personal loans, including local banks, credit unions, and online lenders.
-
Prequalify for personal loans: If a prospective lender offers the option, prequalify. Doing so could help you get an estimated loan amount, rate, term, and fees.
-
Estimate your overall costs: Once you have prequalifications from a few lenders, use a loan calculator to estimate your overall costs, including interest and fees, over your loan’s term.
-
Formally apply: Once you’ve estimated your costs and identified the best option, your last step is to formally apply for a personal loan. You’ll need to share personal information like your name, address, birth date, Social Security number, employer information, and financial information like bank statements, proof of income, and past W-2s.
Read more: What’s the best place to get a personal loan?
Origination fee FAQs
No, not all personal loans have origination fees. Some lenders don’t charge them at all, others charge a flat percentage, and still others have a range of fees they may charge borrowers.
Origination fees are relatively common. Depending on the lender you choose, you might not be able to avoid paying one. That said, some lenders don’t charge these fees at all.
As you shop around for a loan, ensure you compare potential fees and interest rates to estimate your loan costs. You might find that a lender with a slightly higher origination fee offers a lower rate, which could save you money over your loan term.
You typically can’t negotiate an origination fee. That said, opting for a smaller loan or shorter term could result in a reduced or waived fee, as could applying with a co-borrower.
Lenders typically deduct the origination fee from your loan proceeds before they send you the money. For example, a 1% origination fee on a $2,000 loan means you’ll receive $1,980 when your loan funds are disbursed.
This article was edited by Alicia Hahn.
