What Is a Personal Loan Origination Fee?

Written by Bradon MatthewsReviewed by Nathan Brown, CFP®Updated: 8th Apr 2022
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If you’re looking to take out a personal loan, it is important to know what it will cost you and if there are any other hidden fees buried in the fine print.

Personal loan lenders primarily make money by charging interest. But that isn’t the only way lenders make money. There are several different fees they charge as well.

One of the most common is known as an origination fee.

What is an origination fee? How are they determined? And should you ever accept a loan with an origination fee?

Read on to find out what a personal loan origination fee is, how much it costs, and if it can be avoided.

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What Is a Personal Loan Origination Fee?

As the name implies, personal loan origination fees are a fee you pay when you take out a personal loan.

Put simply, a personal loan origination fee is what a lender will charge you for processing your loan.

Not all loans have origination fees, and even among those that do, the amount can vary wildly.

How Do Personal Loan Origination Fees Work?

Origination fees are charged as soon as you take out your loan. However, you will rarely have to pay the fee out of pocket.

Instead, lenders tend to just deduct the fee from your loan. In practice, this just looks like you receive slightly less than your overall loan amount.

Let’s say you borrow $10,000 with an origination fee of 1%. The lender will give you $9,900, keeping the difference as payment of the origination fee.

This may seem like a bad deal, but it’s important to remember that origination fees are part of the overall loan agreement. There may be instances where the origination fee allows for a lower APR, meaning you pay less overall.

How Are Loan Origination Fees Determined?

There is no one formula used by all lenders to determine origination fees. Each lender runs its own evaluation. As such, the only way to know what your origination fee will be is to view the loan offer itself.

That said, some common elements tend to impact most lenders’ evaluations.

Your credit score will almost always be a factor in a lender’s appraisal. Having a good credit score will typically mean lower origination fees.

The loan length will also play a significant role in most evaluations. Short-term loans tend to mean less interest accrued, and as such, lenders may look to make money through fees instead.

Loan amounts and what you are using the loan for may also play a role in the lender’s determination.

This isn’t an exhaustive list of factors. Generally speaking, though, better financial standings and smart decisions tend to result in lower origination fees.

How Much is a Personal Loan Origination Fee?

As stated above, personal loan origination fees will vary. There is no one standard rate that you can expect across all lenders.

There are, however, some basic guidelines that can help you prepare.

Origination loans tend to be percentage-based. Rather than a flat fee, the fees will change depending on the amount you take out.

The percentage rates vary from lender to lender, but they generally stay between 1% and 8% of the loan amount.

The only way to truly know what to expect is to get an actual offer from a lender.

Should You Pay an Origination Fee?

While on the surface, it may seem like origination fees are always a bad deal, but they shouldn’t automatically be a deal-breaker.

If two loans are equal in all respects except for the origination fee, the smart move would obviously be to avoid the fee. However, this isn’t always the case.

Origination fees may be offset by lower interest rates or an absence of other fees.

Because origination fees are a one-time payment, they can save you money in the long run compared to loans with higher APRs. If you can pay $200 now to avoid paying $500 over the next year, then it might make sense.

Are Personal Loan Origination Fees Worth It?

Personal loan origination fees can be worth it, depending on the context and your financial well-being.

As stated above, sometimes, the origination fee is offset by favorable interest rates. In these cases, it can be worth paying the fee now to avoid racking up interest later.

Additionally, the fee may be worth it if it gets you your money quickly and allows you to deal with a financial emergency.

How Do I Avoid Personal Loan Origination Fees?

Not all personal loans charge origination fees. If you want to avoid them altogether, you just need to be strategic.

#1. Compare Multiple Quotes

Different lenders will give you various loan offers. Some lenders won’t charge origination fees at all.

Don’t just take the first loan you’re offered. By taking the time to compare quotes, you can find a lender that won’t attach an origination fee to your loan.

#2. Interest Rates

Choosing to take a loan with slightly higher interest rates will often negate the need for an origination fee. While not always favorable, this can be a good strategy if you can pay the loan back quickly. Run the calculations between loans, so you know what the best move is in the long run.

#3. Additional Fees

Some lenders might forgo origination fees and instead opt for others, such as late or early payment fees. If you feel confident you won’t need to pay these fees, you can avoid the origination fee and save money.

#4. Turnaround Time

Many lenders that provide rapid access to funds charge origination fees. If you can wait a bit longer, you may be able to find a personal loan that doesn’t have an origination fee.

Bottom Line: What Is a Personal Loan Origination Fee?

A personal loan origination fee is a fee you pay upfront for taking out a personal loan.

While fees are rarely a good sign, loans with origination fees can sometimes be smart financial moves when compared to loans with higher APRs or other fees.

The best way to determine if a loan is a good deal is to compare offers and calculate the amount you’ll pay over the life of the loan.

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Bradon Matthews
Bradon Matthews

Bradon Mathews is a personal finance writer & product analyst with a breadth of experience. He enjoys analyzing market information and trends to help you make sense of the complex and ever-changing world of finance. His passion is providing practical advice so you can feel more confident managing your money. Bradon attended Colorado State University where he studied Philosophy.