A personal loan origination fee is a one-time, upfront charge that a lender collects to cover the costs of processing and setting up a loan. They typically range from 1% to 10% of the loan amount, but you may see ads for zero origination fees. The specific amount depends on factors relating to both the lender and the borrower.
Personal loans can be a good way to receive a lump sum of cash to be used for almost any purpose, but it’s worth noting that there are usually fees beyond the interest you pay. Learn more about origination fees here.
Key Points
• Personal loan origination fees typically range from 1% to 10% of the loan amount, depending on the lender and borrower’s creditworthiness.
• These fees cover the cost of processing the loan and are typically deducted from the loan disbursement.
• Borrowers with higher credit scores and lower debt-to-income ratios may qualify for lower origination fees.
• Origination fees can significantly impact the total cost of the loan, so it’s important to factor them into the decision.
• Some lenders offer loans with no origination fees, which may be a more cost-effective option for borrowers.
Personal Loan Origination Fees Defined
Personal loan origination fees are an upfront, one-time charge by the lender that covers the costs of processing the loan, including the application, underwriting, and funding.
Typically, lenders charge origination fees as a percentage of the total loan amount. It’s usually 1% to 6% of the principal, but origination fees may go as high as 8%, 10%, or even 12% of the loan amount. In some instances, a lender may charge a flat fee instead.
Not every personal loan has an origination fee, and lenders may differ in how they require consumers to pay it, if it’s included.
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How Do Personal Loan Origination Fees Work?
If a lender charges an origination fee for a personal installment loan, it’s usually a percentage of the loan amount, somewhere between 1% on the low end and 10% on the high end. For example, if you take out a personal loan for $15,000 and there’s a 5% origination fee, you’ll pay $750 in fees.
Lenders typically subtract this fee from the total loan amount. In our example, that means they’d offer you a loan for $15,000, subtract $750 from the amount, and give you $14,250. But you’d still have to repay $15,000, plus interest. If you truly need the full $15,000, it’s a good idea to request more than $15K to ensure that you have enough funds after the origination fee is deducted.
In other cases, a lender may require that origination fees be paid out-of-pocket by the borrower, or the fees are added to the loan total. Ask your lender to be sure of their policy.
In this case, the personal loan origination fee would be reflected in the APR, or annual percentage rate, calculation. That’s why experts often suggest comparing loans by their APRs. The APR, which includes the interest rate plus fees, represents the annual cost of a loan and will give you a true picture of what you’ll pay over the life of the loan.
How Much Are Personal Loan Origination Fees Usually?
Personal loan origination fees typically vary between 1% and 10% of the total loan amount. Depending on how much you’re borrowing, this fee can get extraordinarily high.
For example, if you borrow $100,000 with an 8% origination fee, that’s an extra $8K you’re paying on top of the loan amount and interest.
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How Are Origination Fees Calculated?
Lenders may advertise a set origination fee or a percentage range. If it’s the latter, how exactly do they determine the percentage you’ll pay?
1. Credit Score and Financial History
Unsurprisingly, lenders primarily consider your credit score and debt-to-income (DTI) ratio. The stronger your credit score and the lower your DTI ratio, the lower origination fees you might be offered. Lenders that don’t charge origination fees at all may have strict requirements that only borrowers with good or excellent credit can meet.
2. Loan Amount and Term Length
Lenders may also consider the length and size of how the personal loan works. Having a cosigner with good credit can help reduce your fees. In addition, lenders may ask your reason for borrowing or use other information from your application when setting your fees.
3. Lender Policies and Market Conditions
The lender’s policies may impact how much you’ll pay in origination fees. Some may feature a 0% offer to attract new clients; others may earn money by charging a double-digit fee.
Market conditions can also impact rates. When lenders need to compete aggressively to win customers, they may drop their fees. Conversely, when rates are high and it may seem riskier to lend, financial institutions may raise the origination fees they charge.
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When Is an Origination Fee a Dealbreaker?
It’s wise to compare the loan APRs, which represent your total annual costs. A loan with no origination fee but a higher interest rate may wind up costing you more in the long run; comparing APRs can help you figure it out.
So when is a personal loan origination fee a dealbreaker? If the fee makes your total cost of borrowing higher than another offer, you should consider the better loan offer.
All lenders are required to disclose their fees as part of the Truth in Lending Act. If a lender advertises no origination fees, it’s a good idea to check the fine print to see if they’ve disguised the fee with a look-alike fee, like an “administrative” or “application” fee. If a lender does this and it gives you bad vibes, go with your gut — you should always feel good about the lender you choose.
Ways to Minimize or Avoid Origination Fees
If you, like most people, want to pay as little in terms of origination fees as possible while still getting a good overall deal, consider the following.
1. Comparing Lenders and Shopping Around
Don’t sign on with the first quote you get, nor assume that a “no origination fees” offer is the best. Shop around, and see the total cost of a loan: what you will pay in terms of interest and fees. That way, you can feel confident that you are getting the best deal.
2. Negotiating Loan Terms
You can ask a lender to work with you on loan costs. They may be willing to make reductions in fees in order to snag your business. This can be especially true if you have a solid credit profile.
3. Considering No-Fee Loan Options
As noted above, some lenders offer no-fee loan options, which can help with affordability. But do your research: Take a close look to make sure that the overall cost of the loan suits your needs. You don’t want to sign on to a no-fee loan with a higher interest rate that makes the loan more expensive overall. Also read to fine print to see if origination fees are actually being charged but appear under a different name, such as application fees.
The Takeaway
When you are thinking about getting a personal loan, origination fees may be charged; these are typically between 1% and 10% of the loan amount, though some no-fee loans may be offered (and flat fees as well). The origination fee you are assessed may vary with the lender’s policies, your credit profile, and market conditions. It’s important to consider how origination fees can impact the overall cost of your personal loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
How much are personal loan origination fees typically?
Personal loan origination fees typically range between 1% and 10% of the loan amount. Factors that impact rates include the lender’s policies, your credit score, and market conditions.
Do private loans always have origination fees?
Many private lenders charge origination fees, but that is not always the case. Before taking out any loan with a private lender, it’s a good idea to compare origination fees and APRs.
Can origination fees be negotiated?
You can often negotiate origination fees for certain types of loans, such as mortgages and personal loans. Just be sure that lower origination fees don’t mean higher interest rates and negate any savings. You’ll be in the best position to negotiate fees with a solid credit profile.
Are origination fees refundable if I pay off my loan early?
Generally, origination fees are not refundable if you pay off a loan early, according to Experian. However, you may be able to get a partial refund from some lenders.
What are other personal loan fees to consider?
In addition to interest and origination fees, personal loans may collect application fees, late fees, and returned payment fees.
Photo credit: iStock/lechatnoir
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