When you take out a loan, you may have to repay more than the principal and interest. Many lenders also charge an origination fee, which could add hundreds of dollars in extra costs to your loan.
What are loan origination fees?
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. Origination fees are sometimes referred to as points on your personal loan. Loan origination fees for personal loans 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 determined by charging a percentage of the original loan amount for the services of getting you prequalified for a personal loan. Try to avoid loans with these fees. If you can’t, you can typically repay your loan origination fee 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:
- Your credit score
- Your assets
- Your liabilities
- Your total income
Greg McBride, Bankrate’s chief financial analyst, says 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.
How to compare loan fees from different lenders
When you’re loan shopping, don’t put all your focus on interest rates. Look at the annual percentage rate (APR), too. The APR better reflects the full cost of the loan by including loan fees as well as interest.
For example, let’s say you’re comparing personal loans from two lenders. Both offer 5 percent interest and a loan term of 5 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 the second.
“This is why it’s important to comparison shop based on APR,” says McBride. “It puts everything on an apples-to-apples basis.”
Do all loans come with origination fees?
Some lenders advertise loans that don’t charge origination or processing fees, but don’t assume these offers are always the cheaper choice. Lenders are still looking to get back application costs.
If you’re considering a no-origination-fee personal loan, pay close attention to the loan’s other costs. Lenders may try to make their money back through higher interest rates or prepayment penalties instead.
In addition to origination fees, other factors to consider include:
- Monthly payment
- Prepayment penalty fee
- Security deposit (secured loans)
- Term length
Depending on the lender, you may have to pay other fees attached to your personal loan as well, such as application fees, late payment fees, returned check fees, check processing fees, and more. Lenders are required to disclose all associated fees so make sure to take them all into account.
Try to minimize the pinch of origination fees
All loans come with interest and fees — consider them the cost of borrowing money. If you’re not careful, however, they can add hundreds or even thousands of dollars to your loan.
Reading the fine print and knowing the right questions to ask lenders can help you avoid some of the sting.
LEARN MORE ABOUT LOANS: See our resource section for information on the best ways to borrow.