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What is a Loan Origination Fee?

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You’ve likely seen the term “loan origination fee” in most information about loans, and it is one of the most critical and immediate aspects of a personal loan that you must understand. So, what is a loan origination fee? Simply put, it is a charge that a lender requires a borrower to pay to get the loan1. It’s a one-time charge commonly calculated as a percentage of the loan. For instance, a 1 percent origination fee on a $10,000 loan would be $100.

You may think of these fees as a necessary cost of doing business, like the equivalent of putting some money down on the purchase of a new car or home, but this is not the case. Though they are quite common, personal loans are often attainable without ever paying origination fees.

In fact, many experts advise against agreeing to a loan where loan origination fees are part of the agreement.

Why should you avoid them, if possible? Because they’re calculated as a percentage of the loan, one of the effects of origination fees is that the more you borrow, the higher the fee2. And origination fees on personal loans can go higher than 1 percent, sometimes much higher. It should be noted that 5 percent origination fees are not uncommon3. For example, Lending Club and Prosper both feature a borrowing fee that can be up to 5 percent. That would make the origination fee on that $10,000 personal loan $500. So, if $10,000 is the exact amount you need, you may need to reconsider your loan amount request.

Discover Personal Loans, on the other hand, have zero origination fees.

Woman Viewing What a Personal Loan Origination is

That’s not all. Origination fees are included in the annual percentage rate (APR) you pay for your loan4. The effect of fees on the cost of your personal loan is why some experts5 recommend comparing loans not just on the interest rate, but on the APR. A loan with a low rate but high fees can wind up being more expensive than one with a higher rate but no or low fees.

Not surprisingly, experts suggest that for the best deal on a personal loan, the only cost you should pay is the interest on the loan. Avoiding fees can be tricky; fees may come in varieties, ranging from loan origination fees to loan closing costs6.

It’s important to be informed when it comes to personal loan origination fees and charges. At Discover Personal Loans, we charge no origination fees or closing costs, and no prepayment penalty, making it easier for you to focus on planning for your financial future.