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What is a loan origination fee?

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Borrowing money requires you to spend money. In addition to the interest you pay on the amount you borrow, there are other finance charges you should consider. One of the fees they might charge is an origination fee. So what’s that?

Here’s what we’re going to cover:

  • What are loan origination fees?
  • What is the loan origination process?
  • How much are personal loan origination fees?
  • How is the loan origination fee collected?
  • Can I avoid loan origination fees?
  • Oportun: Affordable lending options designed with you in mind
Key takeaways: Personal loan origination fees

  • An origination fee is one of the costs involved in taking out a loan. It helps lenders pay for the work of processing your application and creating the loan.
  • Some lenders charge origination fees; others do not.
  • Most origination fees on personal loans run from 1 percent to 10 percent of the loan amount.
  • The best way to compare total costs on loans is by looking at their annual percentage rates (APRs).

What are loan origination fees?

A personal loan origination fee, sometimes called an administrative fee, is a one-time fee that some lenders charge to cover the lenders’ cost of processing and opening your loan. A lender incurs expenses to process your application, check your credit, and create the necessary paperwork when you receive a loan. The origination fee helps the lender pay for this work.  

Note that an origination fee is different from an application fee. With an origination fee, you pay the fee only if you actually take out the loan. With an application fee, some lenders will charge you a fee of $25 to $50 just to submit your loan application, whether it is approved or not, to cover the cost of processing your application. You can save money by choosing a lender who does not charge application fees, especially if you apply to more than one lender.

What is the loan origination process?

When you apply for a loan, you must submit personal information to the lender. You’ll usually need to provide proof of your identity, physical address, and income. You may also have to authorize a hard inquiry into your credit and give the reason you’re applying for a loan.

Lenders spend time and resources considering applications and closing loans. For example, they verify application information by checking with the credit bureaus and your employers, calculate your debt-to-income ratio, and determine what offers are available to you. There are even more costs when you accept a loan since lenders must prepare loan documents, manage the closing process and then get you your money. All these processes, and others, take time and effort. The origination fee goes to cover the cost of this work.

How much are personal loan origination fees?

Origination fees are usually calculated as a percentage of either your principal balance or the amount financed. Most origination fees on personal loans run from 1 percent to 10 percent of the loan amount.

It’s helpful to know that different lenders structure their fees differently. For example, one lender may charge separate closing costs, underwriting fees, and processing fees. Another lender may group all these charges together and call them origination fees.

An origination fee is included in an APR calculation. However, an application or processing fee may not be since those are costs to apply, rather than costs of credit. 

How is the loan origination fee collected?

If your lender charges an origination fee, it is typically due at the time you take out a loan. The lender may collect this fee in one of two ways: by deducting the origination fee from the principal balance, or by adding it into the amount you have to repay.

Suppose you take out a personal loan with a principal balance of $5,000 with a 5 percent origination fee. That means your origination fee comes to $250. If this fee is deducted from the principal balance, you will get $4,750 rather than $5,000.

On the other hand, if the origination fee is based on amount you finance, then the fee is added to that amount to get your principal balance. For example, if the 5% origination fee is on the amount financed of $5000, the fee would still be $250 but the principal balance would be $5250 and, you will get the entire $5,000. But now you will owe $5,250 for the loan, along with interest charges and any other fees you must pay.

This is why APR is so helpful. It tells you the total cost of the credit, which makes it much easier to compare loan offers.

Can I avoid loan origination fees?

Sometimes a lender will offer to waive origination fees in exchange for charging you a higher interest rate on the loan. Once again, you should check the APR to determine the total cost of the credit to make a decision if this is the right financial choice for you. 

Before you sign anything, be sure to read the loan agreement carefully and ask any questions you may have. A reputable lender should be happy to explain the conditions of the loan in detail. You’ll want to know exactly what you’re agreeing to and how much the loan will cost before you make a decision.

Oportun: Affordable lending options designed with you in mind

Now that you understand what a personal loan origination fee is, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options.  Visit our homepage to learn about:

  • Personal loans
  • Secured personal loans
  • Credit cards
  • And more!

 

Sources:

Experian. What is collateral?

MyBankTracker. 6 personal loan fees that you need to know

NerdWallet. What is a personal loan origination fee?

Experian. Understanding loan origination fees

Consumer Financial Protection Bureau. What is a Truth-in-Lending disclosure? When do I get to see it?

Bankrate. Loan origination fees

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