What Is a Personal Loan Origination Fee, and Should You Pay One?

Some personal loans charge origination fees. Is it a good idea to pay for these loans?

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Personal loan money can be used for many purposes, from refinancing debt to funding large purchases to remodeling your home. But if you’re considering taking out a personal loan, it’s important you shop around carefully to find the best rates and terms.

As you compare personal loan options, you may find that some lenders charge different fees than others do. For example, many lenders charge a personal loan origination fee. But what exactly is a personal loan origination fee and is it worth paying? This guide will help you find out.

What is a personal loan origination fee?

A personal loan origination fee is an up-front fee that you pay to a lender when you take out a loan. These fees are charged in order to cover the expenses associated with processing loan applications and providing funding to approved borrowers. 

How much is a personal loan origination fee?

In most cases, you will not pay a flat fee if you are charged a personal loan origination fee. Instead, you will be charged a fee that is equal to a certain percentage of your loan. Each lender should disclose what percent of your loan amount you’d pay for an origination fee. 

For most lenders that charge this fee, the percentage you’re charged could range from around 1% to 8%. However, the fee could also be larger or smaller with a particular lender you are interested in borrowing from. 

Since your fee is charged on a percentage basis, the fee will be larger if you take out a bigger loan. If you borrow $20,000 and you are charged a 1% fee, your fee would be equal to $200. But if you borrowed $45,000 and paid the same 1% fee, you would be charged $450 for an origination fee. 

What determines your loan origination fee?

Some lenders charge the same origination fee to every single borrower who borrows money from them. Others will determine your origination fee based on your borrower profile. If there’s no fixed or set origination fee, some of the factors that the lender may consider in deciding how much to charge you include:

  • Your credit score
  • The amount of your loan
  • Your loan repayment term
  • Your income
  • The purpose of the loan
  • Whether you have a cosigner and the cosigner’s credentials

If you are a well-qualified borrower taking a smaller loan with a shorter repayment term, your origination fee should be lower than if you have only fair credit, if your income isn’t quite as high as the lender would like, or if you’re borrowing a large amount to repay over a long time.

How do you pay your personal loan origination fee?

When you’re charged an origination fee, you don’t transfer the fee amount to your lender. Instead, the money is taken out of the funds that you receive when you get your loan. 

So if you borrow $20,000, you wouldn’t actually receive the full $20,000 if the lender charged an origination fee. The fee amount would be subtracted from the money the lender sends to you when you receive your funding. If the fee was $200, then instead of getting the full $20,000 you borrowed, you’d be provided with $19,800 when your loan closed. 

You’ll need to account for this if you are borrowing money for a specific purpose and require the full amount you’ve applied to borrow. If you needed $20,000 to consolidate your debt or to fund a purchase you are trying to make, you’d have to actually borrow more than $20,000 to make sure you got the full amount necessary after the loan origination fee was taken out. 

You can figure out how much money you need to borrow to get the funds you need -- plus cover the fee -- by dividing the amount you need to borrow by the percentage of the funds you get after the fee is taken out. So if your origination fee was 2%, you’d get 98% of the funding. You’d divide $20,000 by 98% to find out how much you have to borrow. This calculation would show you need to borrow about $20,408 to end up with $20,000. 

Do all lenders charge personal loan origination fees?

While many lenders charge origination fees, some do not charge any up-front fees. If you do not want to incur a fee for taking out a loan, shop around for a lender that doesn’t charge this up-front cost. You can check out our picks for the best personal loan lenders to compare rates and fees. 

Should you pay a loan origination fee?

While paying an up-front fee may seem like a major negative, there are times when it makes sense to pay one. For example, you may decide paying an origination fee is worth it if:

  • You can get a lower interest rate with a lender charging an origination fee than with a lender that doesn’t charge this up-front fee. Say you’re comparing two lenders that are each offering $20,000 loans to be repaid over three years: one that charges 7% interest and a 1% origination fee and the other that charges no origination fee but the interest rate is 10%. With the first loan, you’d pay $200 up front, your monthly payment would be $618, and you would pay $2,231 in interest over time. With the second, you wouldn’t pay an up-front fee, but would pay $645 per month and would pay total interest costs of $3,232. Clearly, paying the $200 up front would save you money in the long term. 
  • You can only qualify for a loan with a lender charging an origination fee. Many of the lenders that charge no origination fees provide loans to only the most well-qualified borrowers. If you cannot qualify for a loan with a lender that doesn’t charge an up-front fee, you may have no choice but to pay the fee if you want to borrow. 

In some cases, a loan with an origination fee may better suit your needs for other reasons, such as because the loan provides funding faster and you need the cash right away, or the loan with the origination fee offers the repayment term you need. 

Make an informed choice about personal loan origination fees

A personal loan origination fee is a fee that some lenders will charge borrowers to take out a personal loan. There are ways to figure out if paying the origination fee is worth it: You’ll need to compare the rate and loan terms of the loan with the fee to other lenders that don’t charge an upfront cost. 

By keeping this in mind as you shop for loans, you can decide if paying an origination fee makes sense in your situation. 

Our Picks of the Best Personal Loans for 2019

We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.

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