If you’re considering applying for a personal loan, chances are you’ve come across a common, but possibly unfamiliar, financial term — origination fee. You may also see it referred to as an underwriting, administrative or processing fee, depending on the lender. Before you choose a loan company, it’s important to get a clear understanding of what an origination fee is, why it’s charged and how it factors into your overall decision.
What is an origination fee?
A loan origination fee is a one-time, upfront operational charge a lender charges to cover the cost of processing your loan and disbursing the funds.1 Depending on the state where you open your loan, this could be a flat fee or a percentage of your total loan amount.
How are origination fees calculated?
While the criteria may vary from lender to lender, three common factors for determining an origination fee are:
The amount and length of your loan: Since origination fees are based on a percentage of the loan total, a higher loan amount generally means a higher cost. For example, a 5% origination fee on a $5,000 loan is $250, while the same fee on a $10,000 loan would be twice as much.
Your credit score and credit history: Having good credit not only makes it easier to get approved for a personal loan, it can also result in a lower origination fee.
Whether you have a cosigner : If your credit score isn’t as strong as you’d like, adding another person’s income and good credit history to your loan application can increase your chances of getting more favorable loan terms, including a lower origination fee.
How much can origination fees cost?
Origination fees typically range from 1% to 8% of the total loan amount.2 Depending on your state and lender, these fees can either be deducted from or added to your loan. Either way, you won’t need to pay the fee out of pocket.
Do all personal loans have origination fees?
Not all loans have origination fees. However, when a loan does not have one, the lender often charges additional fees or a higher annual percentage rate (APR), which would end up costing you more in interest over the duration of your loan.3
If you’re considering a personal loan that has no origination fee, look carefully at other associated fees and your APR, as a higher APR can add significantly to the overall cost of borrowing.4
Should I pay an origination fee?
Examining all loan terms and fees is key in determining whether an origination fee makes sense in your decision to apply for a personal loan.
First, consider the length of your loan. For a loan term of four years, a $400 origination fee breaks down to $100 per year. Compare that to the additional fees charged by another loan that has no origination fee to determine which helps you pay the least amount over the life of your loan.
It’s also important to take a look at the APR being offered. Just to be clear, a loan’s APR is not the same as the interest rate. Your APR is the yearly cost of your loan, and includes the interest rate plus other fees. Because it includes these fees and charges, your APR may be higher than your interest rate.
It all comes down to choosing what’s best for you
Selecting a personal loan is an important financial decision. Compare all fees, rates and terms carefully before applying. Ask questions, do your homework and make sure you’re getting the best offer for your needs.
1,2. Source: https://www.nerdwallet.com/blog/loans/what-is-an-origination-fee/
3. Source: https://www.bankrate.com/loans/personal-loans/personal-loan-origination-fees/
4. Source: https://loans.usnews.com/when-is-paying-a-loan-origination-fee-worth-it
