Borrowing money can be expensive. Beyond the interest rate, there can be a host of fees, including origination fees. An origination fee is an upfront fee that some lenders charge when you get a loan. The better your credit, the easier it may be for you to qualify for loans without origination fees. But if you have bad credit or fair credit, you're more likely to have to pay one.
Here’s everything you need to know about these fees, including how to lower or avoid them.
What is an origination fee?
An origination fee is an upfront fee that you may pay on different types of loans, including personal loans. It’s often calculated as a percentage of the loan amount — typically this could be anywhere from 1% to 10%. For example, a 5% origination fee on a $15,000 personal loan would amount to $750.
Why is there an origination fee?
“Personal loan lenders can charge origination fees to cover administrative costs associated with processing loan applications, funding the loans, and managing and handling customer service over the life of the loan,” said Kyle Enright, president of lending at Achieve.
Because of the reasons behind these fees, you may also see them referred to as underwriting or administrative fees. Just know that any upfront fee charged to get a loan can increase your overall cost and decrease the loan amount you receive.
Factors affecting origination fees
Generally speaking, the riskier the lender thinks you are as a borrower, the higher the origination fee, though underwriting criteria differ between lenders. Here’s a quick breakdown of some of these factors and how they may impact your fee:
- Credit score: The higher your score, the lower your origination fee is likely to be.
- Income: Those who earn more may be charged a lower or no origination fee.
- Loan amount: Smaller loans are considered a safer bet for lenders, often resulting in a smaller fee.
- Loan term: Longer terms are deemed riskier, so they’re typically associated with a higher origination fee.
However, some lenders do charge a flat origination fee for all applicants.
How origination fees impact you
Origination fees are deducted from the requested loan amount. For example, say you take out a $10,000 personal loan with a 6% origination fee, a five-year term, and an 8% interest rate. The 6% origination fee deducts $600 from your loan amount, leaving you with $9,400.
But those aren’t the only things you need to worry about here.
“Most lenders will deduct the amount of the origination fee from the loan proceeds. So, if you’re looking for a loan of a specific amount, you may need to request a higher loan amount,” said Enright. “Consumers should ask about the policy for handling origination fees of each lender they’re talking to.”
Because these fees can impact how much money you actually receive, they may also impact your decision to borrow in the first place. However, these fees aren’t required with all personal loans, so you may wish to shop around to find one that doesn’t charge them.
You should note that lenders that don’t charge this fee may charge higher interest rates, which could end up costing more long-term. So, you’ll need to look closely at the APR (which is a reflection of your total loan costs, including the interest rate and any origination fee) before going with a lender.
Additional personal loan factors to consider
The origination fee certainly isn’t the only factor you should consider when taking out a loan.
- Loan types: Personal loans are very flexible when it comes to what you can use them for, but if you have a specific need, another type of loan may be a better option. For example, homeowners looking to finance improvements to their house may also consider a home equity line of credit (HELOC). Additionally, most personal loans are unsecured, which means collateral is not required.
- APR: This is the most impactful factor when it comes to how much you’ll pay to borrow. It’s best to seek out the lowest rates available, as the lower your rate, the less you’ll pay in interest. Personal loan APRs generally range from 4.60% to 35.99%.
- Repayment terms: Most lenders typically offer 1 to 7 years to repay a personal loan. Picking a shorter term typically means you’ll pay more per month, but less overall, and vice versa. So, you’ll want to get the shortest term that you can afford.
- Loan amounts: Generally, personal loans range from $600 to $100,000 or more, depending on the lender. Some lenders will offer smaller loan amounts than others, so make sure they can cover your loan needs — including any origination fee. Prequalify with lenders first to get an idea of how much of a personal loan you can get.
- Time to fund: If you need quick cash, there are lenders that can cater to those needs. Otherwise, you can broaden your search to include more traditional lenders. Most lenders usually fund your loan in one week, but there are some who can fund as soon as the same or next business day after approval.
- Minimum credit score: Your credit score will be an important qualification factor. If you don’t have perfect credit, you’ll want to look closely at the lender’s minimum credit score requirement. Good to excellent credit is usually required to qualify for a personal loan, and most lenders prefer a FICO score of 670 or higher. But some lenders offer personal loans for bad credit.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
FAQ
How can I avoid origination fees?
Generally, if a lender charges origination fees, you can’t really avoid them. However, having excellent credit and a high income may also help you reduce origination fees, depending on the lender. And you may even be able to get the lender to waive the fee altogether if you agree to pay a higher interest rate or show a better offer from another lender. The best option, however, is usually to get a lender that doesn’t charge this fee in the first place.
Can I find personal loans with no origination fees?
Yes. In fact, many online lenders do not charge origination fees. You should see that listed on lenders’ websites — either on the personal loan information page or within the FAQ section. You may, however, find that these lenders also come with higher interest rates. Or they may have higher credit score requirements.
How do origination fees differ between personal loans and other types of loans?
Personal loan origination fees (which can range up to 10% or more) tend to be higher than you’ll find with other loans, such as mortgages, where they can be less than 1%. Unlike personal loan fees, other types of loans may have fees that are set or regulated by the government (think: federal student loans), rather than the lender. So, it’s important to understand how your loan works before signing up.
