When borrowers calculate how much they'll spend repaying a personal loan, they usually only consider the loan’s principal and interest. Although these make up the bulk of your debt, there are other costs you should consider.
One additional cost borrowers typically gloss over is the origination fee of a personal loan. Lenders may charge a one-time fee, usually between 1% and 8% of the amount borrowed, and subtract it directly from the borrower’s funds.
For instance, if your loan amount was $15,000 and your lender charges a 6% origination fee, you'll only receive $14,100. But you’ll still have to repay the $15,000 plus interest, which increases the cost of your loan.
Not all lenders charge an origination fee. However, that doesn't guarantee you'll spend less in the long run.
An origination fee is a one-time fee a borrower usually pays upfront. It's also known as an administration or underwriting fee.
Several factors affect a personal loan's origination fee. These typically include your credit score and the loan amount.
Not all lenders charge an origination fee. Those that do usually charge 1–8% of your loan amount. However, some origination fees can be up to 10% of the amount you borrowed.
What Is a Personal Loan Origination Fee?
If you're wondering what an origination fee is on your personal loan, it's a one-time cost when you accept a loan offer from a lender. Origination fees cover the services your lender provides when executing your loan, including processing your application, verifying your information and underwriting.
It’s important to note that lenders can’t charge you an origination fee if you decide to go with a different lender, even if one has shown you multiple offers.
Generally, lenders prefer taking it out of your loan amount before they release the funds to you. This way, they're assured of payment. Alternatively, you can add it to your loan balance if you don't want to pay it upfront.
Lenders typically have a range for how much origination fees cost, usually between 1% and 8%. The exact percentage depends on several factors, like your financial profile and credit standing.
Regarding additional costs, an origination fee isn't the only one you might encounter when applying for a loan. There are others, such as:
- Rate-Lock Fees: Interest rates often depend on market conditions. They might fluctuate over time and are a risk to borrowers whose loan applications take longer to approve, like those for a home loan or a mortgage. Paying a rate-lock fee will lock down an interest rate for a specific period of time.
- Processing Fees: As its name implies, it's the cost a lender charges to execute your loan. It's usually for gathering documentation, funding the loan and completing other administrative services.
- Commitment Fees: A lender applies a commitment fee when it has already set aside funds for a borrower but hasn't disbursed them. This provides compensation to the lender because your loan hasn’t started accruing interest yet.
How Is an Origination Fee Determined?
Now that you better understand what an origination fee in a personal loan is, let's explore the factors that help lenders determine it. While these are the most common factors, they may vary between lenders.
Lenders use creditworthiness as a gauge of how well you manage your debt. A good credit score of 670 or higher will make it more likely that your lender will approve your loan and give you better loan terms.
In contrast, a lower credit score increases the lender's risk. They may charge higher interest rates and origination fees.
Lenders ask for proof of income because they need assurance that you can repay your debt. Having a stable job and higher income makes you a less risky borrower. As a result, lenders are more likely to charge you a modest origination fee and offer better loan terms.
One of the most significant factors influencing your origination fee is how much you're borrowing. Remember, the amount you pay depends on a percentage of your loan amount. The higher your loan amount, the more you'll spend on origination fees, even if your lender doesn't change the rate.
A repayment term refers to how long you have to repay your loan. Usually, this runs from two to five years, but it could be shorter or longer than this range.
A personal loan with shorter terms may cost you less overall, especially if you roll your origination fee to your loan balance because you’ll pay less in interest. However, you should expect to make higher monthly payments with a shorter repayment term.
Interest is what you pay your lender for allowing you to borrow money. However, a lender’s APR range gives you a more accurate picture of your loan costs. The APR accounts for the principal and interest, as well as any fees.
Some lenders don't charge an origination fee, but that doesn't mean you'll spend less overall. Sometimes, the overall cost of a loan with an origination fee might be lower if the lender offers more competitive interest rates.
Let's say you're planning to consolidate your debts and need to borrow $15,000. You compare offers from various lenders and discover they all charge an origination fee. The lowest is 1%, which translates to $150, while the highest is 8%, which is $1,200.
After looking at all the APRs, you decide to accept the offer of the lender that charges a 6% origination fee. Your lender deducts it from your funds, so you only receive $14,100.
If you need the entire $15,000, you'll have to request a higher amount. Otherwise, you'll be short by $750. To ensure you borrow enough for your needs, divide your loan amount by 94%.
In your case, you need to borrow $15,958. That ensures you still get $15,000 after paying the origination fee on your personal loan.
Are Origination Fees Worth It?
An origination fee shouldn't be a factor that makes or breaks your decision to accept an offer. MoneyGeek recommends taking several steps to ensure you make the best choice. Sometimes, you'll discover that a personal loan with an origination fee is the best option.
Measure the APR
When you compare lenders, make sure to review their APR rather than just their interest rates. This will give you the best idea of how much your loan will cost because it includes fees.
Determine the type of interest (variable or fixed)
Some offer fixed interest rates. These are typically higher, but you know you'll pay the same amount monthly, regardless of market fluctuations. Fixed interest rates are easier to work into your household budget.
Variable-rate loans usually have lower interest rates, but these change depending on market conditions. If your lender increases rates during the lifetime of your loan, you may end up paying more in the long term.
Assess the loan amount and repayment terms
It’s best to determine that you're borrowing the appropriate amount if a lender charges an origination fee. Otherwise, you may receive insufficient cash once your lender deducts it from your funds.
Your repayment terms also affect your total loan cost. A longer duration usually translates to higher interest rates. This will reduce the cost of your monthly payment but increase the amount that you’ll pay in interest over the life of your loan. Shorter repayment terms save you money in interest, but your monthly payment becomes more expensive.
Compare multiple quotes
After looking at the different components, the next step is to compare loan offers. Don't go with the first lender you come across or even one you already prefer.
Remember, you might find some lenders with no origination fees, but that doesn't mean you'll spend less on their loan products.
Calculate other fees
Your lender may have other fees in addition to an origination fee. It's best to know all of these before accepting an offer.
You might want to keep an eye out for fees for the application process, late payments or insufficient funds. Some lenders even charge a prepayment penalty.
Frequently Asked Questions About Origination Fees
With the endless amount of information available on personal loan origination fees, it can be difficult to identify key information. Our FAQ section tackles several points that may provide you with additional knowledge.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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