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Personal Loan Origination Fees: What Are They and Should You Pay?
When you’re shopping around for personal loans, it’s easy to focus on the interest rate and APR. But you can’t afford to overlook the fees different lenders may charge.
One of the most important fees to watch out for is a personal loan origination fee, which can add to the total cost of borrowing. While not every personal loan comes with an origination fee, it’s important to know what they are and how they work to decide if paying one makes sense.
What Is a Personal Loan Origination Fee?
A personal loan origination fee is a fee the lender can charge you up front to process and underwrite the loan.
Personal loan origination fees can be a flat dollar amount, though it’s more common for lenders to set the fee as a percentage of the loan amount. For example, you may see a range of anywhere from 1% to 8% for personal loan origination fees, depending on the lender.
This fee can be taken off the top of the loan amount. So for example, if you were taking out a $20,000 personal loan with a 2% loan origination fee, the lender would take $400 out of the loan proceeds and you’d get the remaining $19,600.
That’s important to know since you may have to get a higher loan amount than you initially planned to make up for the fee that’s being deducted. Some lenders, however, may give you the option to add the fee onto your balance. That means you’d be paying interest on the loan itself and fee.
How Personal Loan Origination Fees Are Determined
If a lender charges an origination fee for personal loans, there are different ways it can be calculated.
For example, some of the most common things that can determine a personal loan origination fee include:
- The loan amount
- Repayment term
- Your credit history and credit scores
- What you plan to use the money for
- Your income and assets
Having a better credit score or applying for a personal loan with a co-signer could potentially help you land a lower origination fee. But it’s important to look at all the loan details to make sure it’s worth paying the fee before you commit.
Should You Pay a Loan Origination Fee?
If you’re researching personal loans and come across one or more lenders that charge origination fees, consider what that fee is worth to you.
For example, say that you want to borrow $10,000 and there are two personal loans you’re considering. You can choose Loan A, which has a 2% loan origination fee and an interest rate of 6.5%, or Loan B, which has no origination fee and an interest rate of 8.5%. Both loans have a three-year repayment term.
If you go with Loan A, you’ll have to pay $200 for the origination fee. But even with the fee, the lower interest rate you get translates to a lower APR of 7.84% versus 8.5% for Loan B. And your monthly payment would come to $306 for Loan A compared to $315 for Loan B.
In that scenario, paying the loan origination fee could make sense since you’re getting a lower interest rate and in turn, a lower effective APR and monthly payment. Both could save you money over the life of the loan. Choosing a personal loan with no origination fee simply to avoid the added cost could backfire if it means paying a higher APR.
You could try negotiating personal loan origination fees, though lenders don’t have to reduce the fee. And whether this is successful or not may hinge on the strength of your credit and financial profile.
Compare Personal Loans and Loan Origination Fees Closely
If you’re shopping for personal loans, check to see if there’s a loan origination fee. And if you can’t find that information on the lender’s website, don’t hesitate to reach out and ask what the fee is, if anything, and how it’s calculated.
Next, consider what the APR is for different personal loans and what other fees, beyond an origination fee, you may be expected to pay. For example, some personal loan lenders can charge an application fee to process your application. Or your loan agreement may include a prepayment penalty if you opt to pay your loan off early. Smaller personal loan fees you might be charged include late fees and returned payment fees.
Finally, consider what type of loan terms you’re most likely to qualify for, based on your credit profile and income. Again, the better your credit score the more favorable the terms could be when it comes to loan origination fees and APRs. Getting quotes from multiple personal loan lenders can make it easier to compare different loans side by side to find the right one for your needs.
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Rebecca Lake is a freelance writer specializing in personal finance, credit and debt. She’s a contributor to U.S. News and World Report, Forbes Advisor and The Balance and her work has appeared online at CreditCards.com, MyBankTracker, Money-Rates.com and dozens of other top publications.