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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.

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.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

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. 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.

However, not all loans have an origination fee. 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.

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.

Is paying an origination fee worth it?

Paying an origination fee isn’t usually ideal, but when considering a loan with an origination fee versus a loan without one, it’s important to remember why you’re choosing to get a loan in the first place.

When your loan doesn’t have an origination fee, it means you’re receiving the full loan amount you were approved for. If you’re getting a loan to fund a business, or consolidate credit card debt, getting every cent of the loan might be important to you. However, opting for a loan without an origination fee can end up costing you more in interest over the duration of your loan.

On the other hand, paying an origination fee will usually result in a lower interest rate, which will also lower your monthly payments. With lower payments, you should be able to bring down your debt-to-income ratio so you can pay off your loan faster.

The length of your loan is also important to consider when deciding to pay an origination fee. For shorter-term loans, paying an origination fee is less beneficial because you have less time to get back the fee through interest costs. But if you’re getting a loan for a 20-year mortgage, for example, paying the origination fee could lower your APR and help you save on interest.

Compare loans with an origination charge

Comparing loans with an origination fee will help you save money over time and ensure you’re getting the best deal possible. Here are some things to consider:

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 they require an origination fee and make sure to review the full terms and conditions of your loan to avoid hidden fees.

2. Look at the APR

Your loan’s APR is based on the interest rate, but it can also account for other costs. 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% interest and a loan term of five years. However, the first loan offer has an origination fee of 3%, while the second comes with a fee of 5%. The interest rate stays the same for both loans, but the APR for the first loan will be significantly lower than the second.

3. Consider the length of your loan

In general, the shorter your loan 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.

Other personal loan factors to consider

When you get a personal loan, several factors will determine your interest rate and monthly payments.

1. 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. If you’re thinking about getting a personal loan, consider taking the time to rebuild your credit beforehand. It could end up saving you thousands over the course of your loan.

2. Fixed vs. variable rate loans

With a variable rate loan, your interest rate could change over time based on market rates, which would then increase your total cost. A fixed rate loan is the opposite, meaning that your payments won’t ever change based on interest rate movement.

3. Where you live

Loan rates vary based on where you live. Depending on your home state and the reason for your loan, some lenders will increase or decrease your rates to match. Ask your lender about how they calculate your interest rate and monthly payments so you can estimate the total cost of your loan.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

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, they can add hundreds or even thousands of dollars to your loan.

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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