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If you’re applying for a personal loan, the loan may not be all that you have to pay back.
That’s because some lenders charge what’s called an origination fee. This upfront fee can reduce how much you receive and can be included in the loan’s annual percentage rate, or APR.
As you shop around for personal loans, it’s important to consider each option’s origination fee along with the other features and terms the lenders offer. An origination fee isn’t always a deal breaker — it could be worth it to pay a fee if the loan has a long repayment period, or if the APR still ends up lower than other loan options.
Before you do decide, read this guide to help you understand the fee and why it exists, why you should shop around and how to decide if it’s worth it.
What is a personal loan origination fee?
Personal loan companies can charge origination fees to cover the costs of processing your loan application and paying out the funds.
Instead of a flat fee, you can expect to pay a percentage of your total loan amount, which typically ranges from 1% to 8% with major lenders. For example, let’s say you apply for a $10,000 loan. Depending on the lender you choose, you could be charged a fee of between $100 and $800.
Instead of requiring you to pay the fee out of your pocket, lenders typically deduct the fee from the loan amount. This means that if you need every dollar you’re asking for with the loan, you’ll have to request more to ensure you don’t fall short.
Say you need a $10,000 loan and are expecting an origination fee of 5%. Here’s how you’d calculate the right amount to request.
- Divide the loan amount by 0.95, or 95%, to get the loan estimate you’ll need to request to cover the 5% origination fee and receive the full $10,000.
- In this case, you’d need to apply for $10,527.
How your loan origination fee is determined
Every lender calculates origination fees differently, but some common factors include …
- The loan amount you’re requesting
- The length of the loan
- Your credit scores and history
- Whether you have a co-signer
- Your reason for borrowing
- Other information on your loan application
Since lenders consider different factors, having a pristine credit history and solid income won’t necessarily keep you from paying a high fee.
Is paying an origination fee worth it?
The idea of losing hundreds of dollars upfront just to get a personal loan isn’t anyone’s idea of fun. But depending on the situation, a loan origination fee can still be worth paying. Here are a few things to help you decide if that’s the case for you.
A loan’s APR is based primarily on the loan’s interest rate, but it’s a measure of the annual cost of borrowing the loan and can include many fees in its calculations. That means a loan’s origination fee can be included in its APR calculation. When you’re trying to figure out the total cost of paying off the loan, including its interest, you don’t typically need to add the origination fee on top of the APR. If you do, you could end up estimating a higher cost than necessary.Read more: How an APR is calculated
The length of the loan
A loan origination fee typically has to be paid up front out of your loan funds, but you can think about it as part of the overall cost of the loan. If you’re planning to repay the loan amount over five years, a $500 origination fee would effectively cost you $100 per year over the life of the loan. But if your loan term is only two years, it costs you $250 per year.
If you look at it this way, it may be more worthwhile to take out a loan with an origination fee for a longer repayment period than a shorter one, where the fee may feel like a bigger immediate expense. That way you’ll have more time to cover the cost of the fee in your overall budget.
Considering origination fees as you look for loans
Not all lenders charge a loan origination fee. But many of those that don’t charge the fee offer loans that are designed for people with good or excellent credit. If you fit that bill, it’s crucial that you shop around before you submit an application.
If you have trouble qualifying for a loan without an origination fee, don’t be afraid to call lenders and ask them how they determine their origination fee. Also, look for lenders that allow you to prequalify without a hard credit check. That way, you can view potential loan offers that include estimates of your loan amount, the APR and the origination fee amount.
The more lenders you compare and get prequalified with, the easier it’ll be to find one with the lowest loan origination fee for you.
Paying a loan origination fee isn’t ideal, but it could work for you in certain situations. As you compare different lenders, look at their origination fees alongside all other aspects of the loans to put them in context.
This process can take time, but going through it will help ensure that you’re paying the least amount possible in fees over the life of your new loan.