Simply put, it is a charge that a lender requires a borrower to pay to get the loan. It’s a one-time fee commonly calculated as a percentage of the loan. For instance, a one 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 origination fees are quite common, you can obtain a personal loan without this extra financial obligation. And it can be worth your while to do that.
Why should you avoid origination fees, 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 fee. And origination fees on personal loans can go higher than one percent, sometimes much higher. According to NerdWallet, some lenders charge origination fees as high as 8%. An origination fee on a $10,000 personal loan might be $500. Because an origination fee can reduce the loan balance you receive, if you need a $10,000 personal loan, you may need to adjust you loan amount request to ensure you get the money you need.
That’s not all. Origination fees effectively make your loan costlier. The effect of fees on the cost of your personal loan is why some experts recommend comparing loans not just on the interest rate, but on the Annual Percentage Rate (APR) because those fees are included in the APR calculation. 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 costs.
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.
Want more information on personal loan terms? Read our Quick Primer on Personal Loan Agreements, Terms and Prepayment Penalties.