What Is an Origination Fee?
A loan origination fee is an upfront charge that a lender deducts from the total loan amount. This type of fee can also be thought of as a processing fee. Origination fees are often calculated as a small percentage of the principal.
But while they are fairly common, not every personal loan has one. Lenders should be forthcoming about any fees when presenting loan terms.
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How are loan origination fees charged?
Lenders who charge origination fees for personal loans will typically withhold that money from the principal value of the loan. If you take out a loan with an origination fee, you won’t need to make an additional payment — you simply won’t see that money in the first place. For example, a borrower who agrees to a $10,000 loan with a 3% origination fee would receive $9,700 from their lender (instead of the full $10,000).
When shopping for a loan, it’s important to remember that origination fees are deducted from the money you receive — so make sure to budget accordingly. If you need exactly $10,000 to cover an emergency, you’ll probably want to ask for a higher funding amount in order to account for the loan origination fee, when applicable. If the loan has a 3% origination fee, for example, you’d need to apply for a $10,310 loan in order to receive the full amount you need.
Why do lenders charge a loan origination fee?
There are a few reasons lenders charge origination fees. The fee might cover the costs of running credit checks, doing due diligence on potential borrowers and other parts of the loan application process. By charging an origination fee, the lender can recoup some of the costs associated with processing your loan.
Loan origination fees can also hedge against borrowers with shaky credit profiles. If you have a lower credit score, you may not be able to qualify for a loan — and if you do, you’ll likely have to pay higher interest rates. You may also have to settle for a loan with an origination charge. A high credit score reflects a borrower’s ability to repay their debts, and if you’ve made some credit mistakes along the way, borrowing may be costly.
At the end of the day, origination fees put some money back into the lender’s pockets. Lenders issue personal loans because they want to turn a profit, and origination fees add to those profits.
Are there personal loans with no origination fee?
Some personal loans don’t have required origination fees. Discover, LightStream and SoFi each offer personal loan products without them — but you may need a strong credit history and financial profile to be approved for those loans. If a lender charges a loan origination fee, it usually isn’t negotiable.
While you should understand how fees can impact your loan, not all fees are bad. In some cases, a loan with an origination fee may be more appealing than a loan without one. Here are some hypothetical $10,000 loans with a 36-month term:
| Loan A | Loan B | Loan C | |
|---|---|---|---|
| Origination fee | None | 3.00% ($300) | None |
| Total funding received | $10,000 | $9,700 | $10,000 |
| APR | 10.00% | 10.00% | 20.00% |
| Monthly payment | $322.67 | $322.67 | $371.64 |
| Total cost of borrowing | $11,616.19 | $11,616.19 | $13,378.89 |
Given a choice between all three loans, most borrowers would prefer Loan A. You’d receive the full $10,000 (unlike Loan B) and have a lower monthly payment and total cost of borrowing than Loan C. But if you have to choose between Loans B and C, you might prefer Loan B. Even though there’s a small origination fee (and you’d receive slightly less money), your monthly payment and total cost to borrow would be lower.
Ultimately, a loan origination fee may not be a dealbreaker. Depending on your credit profile, you may not be able to avoid one. Instead, focus on the monthly payment and total cost to borrow, and choose the loan that offers the best all-around value for the funding amount you need.
Other common loan fees
While origination fees are the most commonly charged personal loan fees, there are others to watch out for, including:
- Late payment fees: Most loans include late payment fees. If you make all your payments on time, you won’t have anything to worry about. But, if you don’t, your lender may tack on an additional one-time charge because you’ve fallen behind. In this case, you’ll be charged separate fees for each late payment.
- Dishonored payment fees: Similarly, if you try to make a payment that doesn’t go through for whatever reason, you may have to pay a fee. For example, if you have automated payments set up but there are insufficient funds in your account, you may be charged a dishonored payment fee.
- Prepayment penalties: While prepayment fees aren’t common, especially for personal loans, some lenders may not allow you to repay your loan early without incurring a fee. In those situations, the lender wants you to pay the full amount of interest specified in the original loan agreement.
- Application fees: Again, these fees are also quite rare. Some lenders may force you to pay a fee to apply for the loan in the first place. More often, lenders let you prequalify for a loan without taking a hard credit check — and without paying a fee — so you can see conditional loan terms before applying.
It’s unlikely that you’ll find a personal loan with fees beyond origination fees and those for late or dishonored payments.