by Christy Bieber | Aug. 26, 2019
Some personal loans charge origination fees. Is it a good idea to pay for these loans?
Personal loan money can be used for many purposes, from refinancing debt to funding large purchases to remodeling your home. But if you’re considering taking out a personal loan, it’s important you shop around carefully to find the best rates and terms.
As you compare personal loan options, you may find that some lenders charge different fees than others do. For example, many lenders charge a personal loan origination fee. But what exactly is a personal loan origination fee and is it worth paying? This guide will help you find out.
A personal loan origination fee is an up-front fee that you pay to a lender when you take out a loan. These fees are charged in order to cover the expenses associated with processing loan applications and providing funding to approved borrowers.
In most cases, you will not pay a flat fee if you are charged a personal loan origination fee. Instead, you will be charged a fee that is equal to a certain percentage of your loan. Each lender should disclose what percent of your loan amount you’d pay for an origination fee.
Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.
For most lenders that charge this fee, the percentage you’re charged could range from around 1% to 8%. However, the fee could also be larger or smaller with a particular lender you are interested in borrowing from.
Since your fee is charged on a percentage basis, the fee will be larger if you take out a bigger loan. If you borrow $20,000 and you are charged a 1% fee, your fee would be equal to $200. But if you borrowed $45,000 and paid the same 1% fee, you would be charged $450 for an origination fee.
Some lenders charge the same origination fee to every single borrower who borrows money from them. Others will determine your origination fee based on your borrower profile. If there’s no fixed or set origination fee, some of the factors that the lender may consider in deciding how much to charge you include:
If you are a well-qualified borrower taking a smaller loan with a shorter repayment term, your origination fee should be lower than if you have only fair credit, if your income isn’t quite as high as the lender would like, or if you’re borrowing a large amount to repay over a long time.
When you’re charged an origination fee, you don’t transfer the fee amount to your lender. Instead, the money is taken out of the funds that you receive when you get your loan.
So if you borrow $20,000, you wouldn’t actually receive the full $20,000 if the lender charged an origination fee. The fee amount would be subtracted from the money the lender sends to you when you receive your funding. If the fee was $200, then instead of getting the full $20,000 you borrowed, you’d be provided with $19,800 when your loan closed.
You’ll need to account for this if you are borrowing money for a specific purpose and require the full amount you’ve applied to borrow. If you needed $20,000 to consolidate your debt or to fund a purchase you are trying to make, you’d have to actually borrow more than $20,000 to make sure you got the full amount necessary after the loan origination fee was taken out.
Want to pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment with a lower rate.
You can figure out how much money you need to borrow to get the funds you need -- plus cover the fee -- by dividing the amount you need to borrow by the percentage of the funds you get after the fee is taken out. So if your origination fee was 2%, you’d get 98% of the funding. You’d divide $20,000 by 98% to find out how much you have to borrow. This calculation would show you need to borrow about $20,408 to end up with $20,000.
While many lenders charge origination fees, some do not charge any up-front fees. If you do not want to incur a fee for taking out a loan, shop around for a lender that doesn’t charge this up-front cost. You can check out our picks for the best personal loan lenders to compare rates and fees.
While paying an up-front fee may seem like a major negative, there are times when it makes sense to pay one. For example, you may decide paying an origination fee is worth it if:
In some cases, a loan with an origination fee may better suit your needs for other reasons, such as because the loan provides funding faster and you need the cash right away, or the loan with the origination fee offers the repayment term you need.
A personal loan origination fee is a fee that some lenders will charge borrowers to take out a personal loan. There are ways to figure out if paying the origination fee is worth it: You’ll need to compare the rate and loan terms of the loan with the fee to other lenders that don’t charge an upfront cost.
By keeping this in mind as you shop for loans, you can decide if paying an origination fee makes sense in your situation.
We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.