What Is A Personal Loan Origination Fee And Do You Have To Pay It?

6 Min Read
Updated March 8, 2024
Written By
Kevin Graham
Couple with financial expert.

Whether you’re looking to do some debt consolidation, fund a home improvement project or get money for some other opportunity, a personal loan may be a good option. Because of how personal loans work and without a need for collateral, they may be an attractive option. However, there are costs. For example, many lenders charge a personal loan origination fee.

What Is An Origination Fee On A Personal Loan?

An origination fee is an upfront fee lenders charge borrowers to cover the administrative costs of processing a loan. The fees on a personal loan can be a flat rate or a percentage of the total loan amount, typically ranging from 1% – 10%.

Personal loan origination fees cover the costs run up by a lender when evaluating you for and funding your loan. This fee is in addition to the interest charged on your loan. However, unlike closing costs on other loans, you usually don’t have to come out of pocket for this. The one-time fee is often taken out of your loan amount.

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How Do Origination Fees Work?

The origination fee on a personal loan is typically taken out of the proceeds. As an example, if you’re approved for a loan amount of $10,000 and the lender charges an origination fee of 6%, your actual loan will be for $9,400. That’s because 6% of $10,000 is $600, which is subtracted from the loan amount.

The actual amount of the fee is decided by lenders on a case-by-case basis. Some of the factors they consider are the same that they would use in your overall loan approval, and potentially others related to loan attributes:

  • Credit score: Your credit score serves as a primary indicator of your ability to pay back the loan. The higher this is, the better it is for you. This takes into account your full credit history including the number of accounts you have and any negative marks like late payments. Usually, FICO® Score is the credit score lenders consider.
  • Monthly income: The higher your monthly income, the better your chances of paying back the loan.
  • Debt-to-income ratio (DTI): DTI ratio looks at the percentage of your gross monthly income that goes toward minimum monthly debt payments. The lower this ratio is, the more money you’ll have to pay off your debts, signifying less risk.
  • Number of credit inquiries: If you have many inquiries for loans and credit recently, it’s considered a sign you could be overextending yourself.
  • Homeownership: If you have a home loan, it can be a good sign that you’ve qualified for and been able to handle a large loan in the past.
  • Loan term: Longer loan terms typically feature higher rates and fees because of the longer payoff period.

Do All Personal Loans Have An Origination Fee?

No. Some personal loan lenders don’t charge an origination fee. However, personal loans without origination fees often have high credit score requirements.

When thinking about applying for any loan, you want to build your credit up as much as you can before applying. Higher credit scores and responsibly managed debt will enable you to apply for the best available loan terms, including interest rates and fees.

Additional Personal Loan Factors You Should Consider

In addition to potential origination fees, there are several other factors you should consider when opting for personal loans. Here’s a brief list:

  • Eligibility requirements: Some lenders may charge an origination fee but offer more flexibility in terms of an acceptable credit score and DTI to qualify.
  • Repayment term lengths: Longer repayment terms mean a lower monthly payment, but a higher interest rate. By contrast, you’ll pay a lower interest rate for a shorter-term loan but have higher monthly payments because you have less time to pay it off.
  • Interest rates: Interest rates come in two types, the offered interest rate and the annual percentage rate (APR). Because APR includes closing costs, the bigger the difference between the base rate and the APR, the more fees a lender is charging.
  • Funding time frame: Personal loan funding usually goes pretty quickly, but one of the factors is how many business days it takes them to get the money to you after your loan is approved.
  • Other fees: In addition to origination fees, the lender may charge a prepayment penalty if you pay off early. There are also typically late fees for overdue payments and perhaps a flat fee if a check is rejected for nonsufficient funds.
  • Monthly payment amount: This is perhaps the most important factor, because it determines whether the loan fits in your monthly budget.

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Are Personal Loan Origination Fees Worth The Cost?

When considering getting a personal loan, you should think about whether the loan and all the fees, including the origination fee, make sense for you based on your personal financial situation. Depending on what you’re trying to do, you might have several options.

If you’re looking to consolidate debt and you have a home, a cash-out refinance or home equity loan could be another option. Your home would be collateral, so the loan’s interest rate would be lower than a personal loan. This is also a very viable option to fund a home renovation.

If you don’t want to take on a loan agreement, another avenue for dealing with high-interest credit card debt is taking advantage of introductory offers that allow you to transfer the balance from an existing card and pay no or lower interest on the transferred balance for some time. The key here is to pay off the balance before you have to start paying interest again.

The good thing about getting a personal loan is that the interest is much lower than what you would pay if you financed things with a credit card. You also don’t have to get prequalified. The process of getting the loan funds is much faster and there are usually just a few lender charges.

The Bottom Line

A personal loan origination fee charges for the lender’s cost of evaluating you for and setting up your loan. Although it can be anywhere from 1% – 10% of the loan amount, you usually don’t pay out-of-pocket. It’s typically subtracted from your loan proceeds. Although not all lenders charge an origination fee, those who don’t may have very high credit standards.

When considering a personal loan, it’s important to know what your goals are and fully contemplate all of the costs. If you’re interested in getting started, you can apply for a personal loan online.

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