How to Decide If a Loan Origination Fee Is Worth Paying

what is an origination fee

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.

Among our top lenders for student loan refinancing, for example, none charge an origination fee. And some of the lenders we work with also offer no-fee personal loans.

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.

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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.

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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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LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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