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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 or Citizens Bank. 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.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|