What Is A Personal Loan Origination Fee And Is It Avoidable?
Miranda Crace6-Minute Read
UPDATED: August 09, 2023
When you apply for a loan, you may incur a variety of fees to cover the lender’s costs. It might be tempting to think of interest rates as the lender’s repayment, but interest rates actually pay the lender for the use of its money.
Lenders also want to recover the costs incurred for processing your loan application, communicating with you and otherwise facilitating the loan process. For this, they sometimes charge an origination fee.
Let’s take a deeper dive into how loan origination fees work, how much you may be charged and whether you’re required to pay them.
What Is An Origination Fee On A Personal Loan?
Lenders charge loan applicants an origination fee to recover their costs for processing an application for a personal loan or mortgage.
Origination fees are also sometimes referred to as underwriting fees, administrative fees or processing fees. Actions covered by these fees include running a credit check for your credit scores, processing your financial records and communicating with you about your application’s progress.
How Origination Fees Work
You won’t be charged directly for your loan origination fee. Instead, your lender will typically deduct it from the total loan amount you’re borrowing. Keep in mind that if you need a certain amount of money, you may want to consider upping your personal loan estimate so it’s enough to cover the origination fee and your expenses.
For example, let’s say you’re asking for a $20,000 personal loan and the loan charges a 1% origination fee. In this case, you’ll need to pay $200 in fees ($20,000 multiplied by 1%). So, to cover your fee and still have the full amount you need, you’ll want to request a loan in the amount of $20,200.
When Do You Pay An Origination Fee?
Origination fees for personal loans are typically paid upfront when you receive the loan. However, this will vary from lender to lender. Some lenders may add these fees to the balance of the loan, for example.
To be sure when the payment for a fee is due, you’ll need to read the fine print of your loan agreement. Here at Rocket Loans℠, the origination fee comes directly out of the approved loan amount.
What Is A Typical Origination Fee On A Loan?
Generally, the origination fee for a personal loan will be 1% – 10% of the loan amount. By comparison, a typical mortgage fee is in the 0.05% – 1% range. Some underwriting fees are negotiable, but you’ll likely have to pay a higher interest rate on the loan in return.
How Are Origination Costs Determined?
Origination fees will vary by lender, and each lender will base its fee on factors such as the amount you’re requesting, the length of the loan term, your credit score and credit history, your reason for borrowing and other distinguishing factors.
At Rocket Loans, origination fees are up to 9% for personal loans, and we publish all personal loan fees upfront.
Can You Avoid Paying An Origination Fee Upfront?
You can sometimes avoid paying the origination fee upfront by bundling it into your monthly payment. Many lenders add this administrative fee to the balance, in which case borrowers must pay interest on the fees as well as the loan amount. This will cost borrowers more in the long run than making a one-time payment.
For this reason, lenders that market loans to consumers must disclose the annual percentage rate, or APR, of their loans. The APR calculates the true cost of borrowing by including both fees and interest. Seeking the lowest APR is one way to ensure you’re charged fairly for the loan.
Can An Origination Fee Be Waived?
In most cases, you can’t have an origination fee waived. The lender charges the origination fee to borrowers to recoup the advance it gave you toward its expenses. With personal loans typically being a form of unsecured debt, origination fees not only help pay for servicing the loan, but they also cushion the blow in circumstances where borrowers default on their personal loan.
For borrowers who are seeking a large loan and have an excellent credit score and income that’s steady and high, some lenders may agree to waive the fee, if asked. In some cases, lenders may also waive fees if the borrower has a business that generates enough revenue for the lender to waive the fee as a courtesy. Some traditional banks and credit unions don’t charge origination fees at all.
Are There Personal Loans With No Origination Fees?
Not all lenders will charge an origination fee for processing your personal loan. The lending marketplace is vast, and borrowers can generally find a wide variety of no-fee/low-fee loans. In most cases, however, borrowers will pay for a lender’s costs one way or another, whether it be through the loan proceeds or higher interest charges.
It’s important for borrowers to shop around for the best deal and avoid any hidden lending charges. In other words, if it seems too good to be true, it probably is.
Is It Worth Paying An Origination Fee On A Personal Loan?
Depending on your situation and loan options, an origination fee can be worth paying in the long run. A loan with a low APR and an origination fee could merit consideration, but if a fee is placed on top of higher interest and less ideal terms, your loan costs could get unreasonably high.
Consider these factors when deciding if it’s worth paying an origination fee on a loan:
- Interest and APR: The interest rate offered by a lender plays a big role in your monthly payment amount, and the APR will calculate your total loan costs per year. If a loan has a low enough interest rate, paying an upfront origination fee may not be as costly as paying higher interest over the life of the loan.
- Your loan amount: An origination fee is typically taken out of the requested loan amount, so make sure enough funds remain for what you need after paying. Since this may require that you ask to borrow more than you need, consider how much money you should apply for in order to cover both the fee and your funds.
- Repayment terms: Like interest rates, the length of the loan term will influence how much you’ll owe before the loan is fully paid – particularly if you’ve chosen to wrap your origination fee into your monthly payments. A longer term may mean you pay less per year, while a shorter term means you’ll pay more. It’s all a matter of what your budget can work best with.
Overall, it’s important before applying for a loan to shop around different lenders and find the best deal offered to you.
Personal Loan Origination Fee FAQs
Still have questions about personal loan origination fees? Take a look at these frequently asked questions and see if we’ve answered yours.
Who pays the origination fee on a personal loan?
The borrower always pays the origination fee on a personal loan. The origination fee is typically deducted from the amount of money borrowed, although it can be paid in other ways as well.
How can I avoid an origination fee for a personal loan?
The surest way to avoid an origination fee is to find a lender that doesn’t charge origination fees. Otherwise, you can ask about potentially waiving the fee or wrapping it into your monthly payments. Beware, though, that the latter solution may involve you paying more in interest as part of an administrative fee.
Are personal loan origination fees regulated by the government?
In many respects, yes. The Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) require compliance with the Truth in Lending Act. This regulatory control came after the 2008 Financial Crisis. The regulations don’t tell lenders how much they can charge for the fee, but they require lenders to disclose in writing all fees that the borrower must pay. Lenders must also provide the APR so consumers can have transparency and compare loan offerings apples to apples.
An origination fee compensates a lender for making your loan possible, and while typically paid upfront, an origination fee can sometimes be paid through other means or avoided entirely. Origination fees are an important factor to consider when researching the best loans, so you should take these costs into account when deciding on the right loan for you.
Shopping for a personal loan right now? See the rates and terms you qualify for with Rocket Loans and start the application process.
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