So you need to borrow money. Maybe you’re refinancing student loans, consolidating credit card debt, or financing an urgent purchase.
In any case, you’ll need the cheapest loan you can get. You’ll also need to know the answer to the following question: what is an origination fee?
Along with interest rates, origination fees are a factor that can quickly increase your borrowing costs. To find the best deals on a loan, figure out what is an origination fee — and when it is worth paying.
What is an origination fee?
Simply put, a lender charges origination fees for processing a loan application and agreement. The loan fee covers the lender’s costs of underwriting a loan, pulling the borrower’s credit and verifying identity and documents.
An origination charge is a common cost on several types of loans, from a mortgage to a car loan or a personal loan. It’s typically a percentage of the total amount borrowed. The average loan origination fee is between one and six percent.
Most lenders will determine the origination fee based on the borrower’s creditworthiness. So if the lender sees you have a less-than-perfect credit history or otherwise deems you’re a riskier bet, you’ll likely pay a higher origination fee.
Here’s how origination fees are collected
An origination fee is not usually charged upfront with a loan application. Instead, it’s collected once the loan is approved, agreed upon, and signed.
Different lenders will have their own policies on how they charge an origination fee. For instance, some will roll it into the loan’s balance. In this case, if you have a $10,000 personal loan with a four percent origination fee, your final balance with the fee added in is $10,400.
Other lenders will deduct the origination fee from the disbursed funds. So for a loan balance of $10,000 with a 4 percent fee, the borrower would only receive $9,600 of the funds. That’s because the lender takes out the $400 origination fee.
Sometimes, a borrower might be required to pay an origination fee outright, with cash, instead of from the loaned amount. This is most common with a mortgage and is typically included in the homebuyer’s closing costs.
Loan applicants should watch out for advance-fee scams, however. These scams promise or guarantee a loan, even for bad credit, but charge high origination fees or have hidden costs.
The Federal Trade Commission (FTC) warns borrowers to be diligent. Research lenders and fees to avoid advance-fee loan scams.
How to compare loans with an origination charge
Because an origination fee adds to your total costs when borrowing, it’s important to factor this into your choice.
On top of comparing terms and interest rates, you’ll also want to cross-check origination fees to ensure you’re getting the best deal.
Loans with no origination fees could be cheaper
With certain loan types or lenders, it’s possible to find a loan with no origination fee.
If you want to get a personal loan with no fee, you simply have to choose a lender that doesn’t charge one, like SoFi. If you can qualify for a personal loan with a no-fee lender, you could save big-time.
However, a no-fee loan isn’t always cheaper. One way or another, a lender will have to cover the costs of originating a loan.
If it doesn’t charge an upfront fee, these costs are often rolled into other loan costs, primarily the interest rate. Because of this, it’s possible you could end up with an APR that will cost you more over the life of the loan than you’d pay for an origination fee.
Compare loan APRs along with fees
You’ll definitely have to do some legwork and compare costs and find the loan that is truly the best deal, including rates and origination fees. To really know how much your costs will be, you need to get some loan offers from different companies then compare the total costs.
Luckily, most lenders will use a “soft credit pull” to evaluate your creditworthiness, which will allow you to get multiple loan offers without adversely affecting your score. Pick some lenders that look most promising, and apply for pre-approval for a loan.
Once you have a few offers in hand, you’ll want to compare a few key items. These include the APR of loans with similar terms, the quoted origination fees, as well as the proposed monthly payment.
When comparing the APR of loans, check whether this includes the loan origination fee or not. Depending on how the loan’s fee is charged, the lender might or might not be required to reflect this cost in the APR.
If all costs are included in the APR, you can compare loans straight across to see which carry the lowest interest costs.
Look at total loan costs
Remember, you’ll want to compare origination fees if these aren’t included in the APR. Depending on the different terms offered, you’ll need to compare the rates along with the origination fee to find which offers the best deal.
For example, maybe you have three loan offers to borrow $10,000 over five years.
Offer No. 1 has a proposed APR of 4.99% with a 3% origination fee, offer No. 2 has no origination fee but an APR of 6.25%, and the last loan has a 1.5% origination fee with a 5.65% APR. Which is the best deal?
Using this handy loan comparison tool, the actual APRs with the origination fees included are as follows:
- No. 1 – 6.214% APR with $11,620 total loan costs
- No. 2 – 6.25% APR with $11,670 total loan costs
- No. 3 – 6.269% APR with $11,652 total loan costs
As you can see, loan No. 1 with the lowest APR when origination fees are included. And it has the lowest cost over the life of the loan, despite having the highest origination fee. The longer your loan is, the more likely it is that the initial cost or an origination fee could be worth paying.
Decide what’s important to you
Depending on what you’re looking for a loan, you might choose one that’s not necessarily the lowest-cost option. Maybe you are willing to pay an origination fee to get a lower monthly payment.
Or maybe you have less-than-perfect credit, and the loans you qualify for all require an origination fee. Many lenders with less-strict credit requirements will also include an origination charge. But paying this fee could unavoidable if you need the loan.
If you know what’s important to you in a personal loan, you can weigh an origination fee to decide on your best option. It can add to your loan costs.
However, you may also find that this fee is worth paying if it gives you access to the financing you need. The only way to know for sure is to research your options and take your time choosing a loan and lender that’s right for you.
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|Lender||RATES (APR)||loan amount|
|5.99% – 20.01%1||$5,000 to $100,000|
|6.14% – 35.99%||$1,000 to $50,000|
|6.98% – 35.89%*||$1,000 to $50,000|
|99.00% – 199.00%2||$500 to $4,000|
|5.99% – 24.99%3||$5,000 to $35,000|
|5.99% – 29.99%4||$7,500 to $40,000|
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|1 Includes AutoPay discount. Important Disclosures for SoFi. |
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3 Includes AutoPay discount. Important Disclosures for Payoff.
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* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.
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