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Loan origination fees

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When you take out a loan, you may have to repay more than just the principal and interest. Some lenders also charge an origination fee to cover the cost of processing the loan, which could add hundreds of dollars in extra costs to your loan. The fee you’ll pay depends on your credit health and overall financial profile.

You could also opt to select a loan that doesn’t come with an origination fee, but that doesn’t mean you’ll save money on the overall loan cost. So, you should do your research, compare loans with and without origination fees, and run the numbers to determine which option is most ideal for your financial situation.

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What is an origination fee?

A loan origination fee is an upfront fee charged by your lender to process a new loan application. Lenders use these fees to offset the costs of underwriting and verifying a new borrower. With mortgages, origination fees are sometimes referred to as points. Many personal loan lenders do not charge origination fees, but if they do, these fees can range from 1 percent to 8 percent of the loan amount, depending on your credit score and the length of the loan.

How are loan origination fees determined?

Origination fees are a percentage of the original loan amount for the services of getting you pre-qualified for a personal loan. If you can’t avoid a loan origination fee, you can typically repay it in one of two ways: roll the fee into your loan’s balance or take it out of the funds you receive.

The amount you will pay in fees is determined by factors such as:

  • Your credit score
  • Your assets
  • Your liabilities
  • Your total income

Greg McBride, Bankrate’s chief financial analyst, says that having the fee taken out of the loan principal may be the only way some people can afford a personal loan. “For a lot of borrowers, it’s much more convenient to have it come out of the loan proceeds simply because they may be strapped for cash to begin with,” he says.

Not all loans have origination fees, but don’t assume these offers are always the cheaper choice. If you’re considering a no-origination-fee personal loan, pay close attention to the loan’s other costs. Lenders still need to make money, so they may try to make their money back through higher interest rates or prepayment penalties instead. In some instances, a loan with an origination fee could still have a lower overall cost.

Should you consider a loan if it has an origination fee?

For lenders that charge origination fees, that cost is a required loan expense — though you may be able to negotiate a lower rate. However, origination fees are not always a deal-breaker. For instance, origination fees on a loan could mean a lower overall interest rate because lenders with no origination fees may raise their interest rates to make up the difference.

The origination fee is only one small part of how your overall loan costs are determined. For example:

  • Your credit score: Arguably the biggest factor that impacts loan rates is your credit score. Someone with a good credit score (670 and above) is more likely to receive a lower interest rate than someone with bad credit.
  • Loan type: With a variable-rate loan, your interest rate could change over time based on market rates. A fixed-rate loan is the opposite, meaning that your payment amounts won’t ever change.
  • Your location: Loan rates vary based on where you live.

Therefore, you need to determine the overall cost to determine if the origination fee will make the loan cost more.

With that said, the origination fee will often be taken out of your loan proceeds, meaning you may not receive your full loan amount. Still, the benefits of taking out a loan with an origination fee could far outweigh the fee itself.

How do you compare loans with an origination charge?

Comparing loans with an origination fee will help you save money over time and ensure that you’re getting the best deal possible.

1. Get multiple quotes

As with any loan, it’s important to shop around to make sure you’re getting a good rate. Look at the best personal loan rates and find a lender that can provide what you need. Ask your loan provider if it requires an origination fee, and review the full terms and conditions of your loan to avoid hidden costs.

2. Look at the APR

Your loan’s annual percentage rate (or APR) is based on the interest rate, but it also accounts for other costs, including loan origination fees. When figuring out the total cost of repaying your loan, don’t include the origination fee on top of the APR. If you do, you’re probably estimating a higher cost than what you would actually pay.

For example, let’s say you’re comparing personal loans from two lenders. Both offer 5 percent interest and a loan term of five years. However, the first loan offer has an origination fee of 3 percent, while the second comes with a fee of 5 percent. The interest rate stays the same for both loans, but the APR for the first loan will be significantly lower than that of the second.

3. Consider the length of your loan

In general, the shorter your loan term is, the lower your interest rate will be. However, shorter loans usually have higher monthly payments. If you’re paying an origination fee on top of high monthly payments, you might be more inclined to opt for a loan without an origination fee to keep costs down.

How can you save on origination fees?

Origination fees are often attached to loans to help lenders make money while offering incentives to the borrower as lower interest rates and other fees that may be included. One of the best ways to save on origination fees is to get estimates from lenders who don’t include them in their loans. Credit unions often have membership requirements to join, but they also typically offer no origination fees on their loans.

Another way to save on origination fees is to negotiate the amount owed. You may not be successful, but it can’t hurt to try. If a lender knows you may choose another option if the fee isn’t reduced or waived, it might be enough to get them to reconsider.

The bottom line

All loans come with interest and fees, so it’s important to consider all costs when borrowing money. If you’re not careful, loan origination fees can add hundreds or even thousands of unexpected dollars to your loan. But that doesn’t mean you should automatically dismiss loans with this fee as they could be more affordable overall than loan options offered by lenders who don’t assess origination fees.

If you’re in the market for a personal loan, make sure you do your research and find a lender that can give you the best rate possible. Reading the fine print and knowing the right questions to ask lenders can help you confidently choose a loan that is within your budget.

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Written by
Dan Miller
Points and Miles Expert Contributor
Dan Miller is a former contributing writer for Bankrate. Dan covered loans, home equity and debt management in his work.
Edited by
Loans Editor, Former Insurance Editor