What Is A Personal Loan Origination Fee And Can I Avoid Paying It?

When you apply for a loan, you may be charged a variety of fees to cover the lender’s costs. We tend to think of interest rates as the lender’s repayment, but interest rates actually repay 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 it.

Lenders charge loan applicants an origination fee to recover their costs for processing an application for a personal loan or mortgage. The origination fee is an upfront charge that the lender uses to cover the cost of processing the loan. Origination fees are sometimes also known as underwriting fees, administrative fees or processing fees. Actions covered by this fee include running a credit check for your credit scores, processing your financial records and communicating with you about your application’s progress.

You won’t be charged directly for your loan origination fee. Instead, your lender will 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 as some may add this fee to the balance of the loan.

Typically, the origination fee for a personal loan will run between 1% and 10% of the loan amount, while a typical mortgage fee runs between 0.05% and 1%. Some underwriting fees are negotiable, but you’ll likely have to pay a higher interest rate on the loan in return.

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^SM, origination fees run between 1% and 6% for personal loans, and we publish all personal loan fees upfront.

Sometimes you can 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 of ensuring that you’re charged fairly for the loan.

Can My Origination Fee Be Waived?

Hey, it never hurts to ask – but in most cases, no.

The lender charges the origination fee to borrowers to recoup the advance it gave you toward its expenses. With personal loans 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 excellent credit scores and steady high income, 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.

Still have questions about origination fees? We’ve put together a few of the most frequently asked questions about personal loan origination fees and how they work.

Who pays the origination fee on a personal loan?

The borrower always pays the origination fee on a personal loan. The origination fee is normally financed, and it therefore rolls into the borrowing balance, but the borrower will still pay it in full with interest.

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 may charge for the fee, but they require lenders to disclose in writing all fees that the borrower must pay, and provide the APR so consumers can have transparency and compare loan offerings apples to apples.

Do all personal loans have 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, either out of the loan proceeds or with higher interest charges.

It’s important for borrowers to shop around for the best deals and avoid any hidden lending charges. In other words, if it seems too good to be true, it probably is.

When do I have to pay the origination fee?

To be sure when the payment for a fee is due, you’ll have to read the fine print of your loan agreement. Here at Rocket Loans, the origination fee comes directly out of the approved loan amount.

You’ll get the best loan terms for your personal loan if you do your research, check out multiple lenders and ask plenty of questions. Ready to get started, without the process impacting your credit score? Apply for a personal loan right now!