What are personal loan origination fees?
Everything you need to know about this common lender fee
Some lenders charge upfront origination fees to cover the costs of processing a personal loan application and disbursing the funds. These origination fees might or might not be worth paying, depending on how much they increase the loan cost.
You can determine the annual cost of the loan, including the origination fee, by reviewing the loan’s annual percentage rate (APR). The APR includes the interest rate you’ll pay and other costs, like the origination fee.
Not all lenders charge personal loan origination fees. Comparing lenders’ APRs when shopping for a personal loan is a good way to evaluate if an origination fee is worth paying.
Key insights
- A personal loan origination fee is an upfront fee some lenders charge to cover the costs of processing your application and disbursing the loan funds.
- Origination fees vary by lender but commonly range from 1% to 10% or more. However, some lenders offer personal loans with no fees.
- A good way to compare personal loan costs between lenders is by reviewing their APRs, which include the annual interest rate and fees.
What is a personal loan origination fee?
A personal loan origination fee is an upfront cost some lenders charge to cover the costs of processing your loan. Origination fees are usually a percentage of the loan amount. These fees commonly start at 1% and go up to 10% or more, but there’s no set range. Some lenders offer fee-free loans.
The best way to compare loan costs is to evaluate the loan APRs. The APR includes the interest rate and the fees you’ll pay. As a result, it’s more accurate to use when comparing total borrowing costs from personal loan companies.
How is a personal loan origination fee calculated?
Personal loan origination fees are usually a percentage of the loan amount you receive. For example, a 2% origination fee on a $10,000 loan would be $200. Since lenders charge origination fees to cover some of the costs of processing your loan, the amount you pay usually depends on your loan’s complexity.
The annual cost of your loan is expressed as an APR, which includes the annual interest rate and any fees associated with your loan. How this cost is calculated depends on several factors:
- How much you’re borrowing: The bigger the loan, the more money lenders risk losing. They sometimes charge higher rates and fees to address this risk and cover the additional time they need to evaluate your application.
- The length of the loan term: Longer-term loans are riskier because there’s a greater chance the market and your financial situation will change. As a result, long-term interest rates are usually higher than shorter-term rates. Additionally, APRs may be higher on short-term loans, since upfront fees are spread out over a shorter period of time.
- Your credit history and score: Lenders usually charge lower rates and fees to people with good credit scores and few credit history problems. That’s because these loans are easier to analyze, and there’s less risk the borrowers won’t repay them.
- Other information on your loan application: Besides analyzing your credit score and history, lenders consider other factors, like your job history, monthly income, assets and other debt. A high debt-to-income (DTI) ratio usually means higher loan costs.
- Whether or not you have a co-signer: Generally, adding a co-signer means you can’t qualify for the loan on your own. It’s also more difficult to analyze a loan with a co-signer, so the loan cost is usually higher.
Ultimately, most lenders consider the risk of the loan to calculate the interest rate, origination fee and overall cost. That means lower-risk loans carry lower costs.
Is it worth paying a personal loan origination fee?
When deciding if it’s worth paying a personal loan origination fee, consider the annual loan cost rather than the fees. Annual loan costs consist of two main parts: the interest rate and fees, which lenders must disclose as an APR. Review the APR to see if the loan costs are worth it.
Use the loan APR — which includes the origination fee — to compare the total cost of borrowing for different loan offers.
“Sometimes the math can be a bit confusing because having a higher interest rate without an origination fee can actually cost less over the life of the loan than a lower rate with an origination fee,” said Matt Lattman, chief marketing officer of personal loans with Discover. Reviewing the APR will better equip you to understand the overall costs.
It’s also helpful to consider how long it will take to repay the loan. It usually makes more sense to pay an origination fee if you get a loan with a longer repayment term (e.g., five years) than one with a shorter repayment term (e.g., two months).
“Check the fees that your loan will come with,” Lattman said. “Yes, how much interest you will be paying is important to understand, but additional fees on the loan can be more impactful. Most people do not take the entire term to pay off their loan, which will save them interest. But, if your lender charges an origination fee, the cost is going to be incurred no matter how long it takes you to pay off your loan.”
It’s also helpful to think about how you’ll pay the fee. Andy Kalmon, CEO of the financial services company Benny, says most lenders subtract the fee from the loan amount before payout. Make sure you calculate ahead of time how much you’ll receive after this deduction so you have enough loan funds for the intended purpose.
Frequently asked questions (FAQ)
Who is responsible for paying a loan origination fee?
The borrower is responsible for paying a loan origination fee. They pay this fee when the loan closes. Lenders often deduct the fee from the loan funds before providing them.
What other fees are associated with personal loans?
Besides origination fees, other fees commonly associated with personal loans are application fees, prepayment penalties and late fees. While the APR will include any required origination and application fees, it won’t include prepayment penalties and late fees since these fees are conditional.
Carefully review your personal loan disclosures and documents to see which fees apply.
Does the government require personal loan origination fees?
There is no requirement that a lender charges an origination fee. However, the federal government requires lenders to include any personal loan origination fees in their APR calculations. The APR calculation includes the loan’s interest rate and any required fees.
Requiring lenders to disclose a loan’s APR makes it easier for consumers to compare the financing costs of lenders with different fee structures.
Bottom line
You may need to pay an origination fee if you get a personal loan. Some lenders charge an origination fee to cover upfront costs, including processing your application and disbursing the funds. Others offer fee-free loans or may waive the fee in some circumstances, such as to match an offer from a competitor.
When shopping for a personal loan, consider the loan’s total annual costs, including the interest rate and any fees. The loan’s APR summarizes its annual cost, making it a great tool for comparing loan options. When in doubt, ask your lender about any loan costs, including if there’s an origination fee and how it’s charged.
Sources
- Consumer Financial Protection Bureau, “ 12 CFR Part 1026 - Truth in Lending (Regulation Z) .” Accessed Dec. 16, 2022.
- Consumer Financial Protection Bureau, “ Understand loan options .” Accessed Dec. 16, 2022.
