Aug 03, 2023

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Man researching loan origination fees online

A loan origination fee is a one-time, upfront charge for processing a personal loan. It can also be called a sign-up fee or an upfront fee.

A personal loan may be a great way to consolidate higher interest debt or pay for an unexpected expense. But it’s important to understand origination fees and any other costs that could be involved.

Any additional fees beyond the interest rate increase the total cost of a loan. When you take out a loan with an origination fee, this can mean you’ll get less money upfront and may have to pay more interest over time along with extra fees. 

While many lenders charge fees, not all of them do. So, it could be worth your while to shop around and find a lender that doesn’t charge any fees.

Read on to learn more about loan origination fees and why it pays to avoid them.

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How do loan origination fees work?

A loan origination fee is charged as a percentage of the total loan amount. For instance, for a $10,000 loan, a 5% origination fee would be $500.

Typically, it is calculated as a percentage of the loan amount. The origination fee is deducted from the total amount borrowed.

This means when the loan is funded, the fee will be subtracted from the loan funds before you receive them. So, you actually get less money sent to you than you applied for, but you will still have to repay (and pay interest on) the full loan amount. Or, you’ll have to apply for enough funds to cover the origination fee and get the net amount you need from your loan.

For example, let’s say you need $10,000 for a home repair. If your $10,000 loan comes with a $500 origination fee, you would receive $9,500 after the fee is deducted. To get the full $10,000 with a 5% origination fee, you would actually need to borrow $10,527. A larger loan amount means that you will pay more in interest over time.

How much are loan origination fees?

Loan origination fees can vary depending on the lender. Loan origination fees usually range from 1% to 8%, but some can go higher.1

Because loan origination fees are based on a percentage of the total loan, a larger loan amount will also increase the loan origination fee.

For instance, with a loan origination fee of 6%, the fee for a $20,000 loan would be $1,200. This fee is taken out of the total amount of the loan. That means that even if you were approved for a $20,000 loan, you would get only $18,800 to use because of the loan origination fee.

How do origination fees affect the total cost of a loan?

An origination fee can decrease the total funds you receive. It also increases the total cost of the loan, making your APR higher than your interest rate.

To see how this works, let’s take an example of a $15,000 loan and look at how different loan origination fees affect the cost of the loan. 

If you borrow $15,000 and the loan includes a 3% ($450) origination fee, you will get only $14,550. ($15,000 – $450). So, if you wanted to get the full $15,000, you would actually need to borrow $15,464. The lender would take the $464 fee upfront, but you would have to pay back $15,464, including interest on the total.

Now say the lender has an 8% fee. In that case, you would have to take out an extra $1,305 to get the full $15,000 in your bank account. You would then have to pay back $16,305, including interest on that total amount.

These extra costs can add up quickly especially when the loan origination fee is higher.  

Here is a quick comparison of how different loan origination fees affect the total cost of borrowing when the loan amount and interest rates are the same:

  No Fee 3% Origination fee 8% Origination fee
Desired loan amount $15,000 $15,000 $15,000
Total loan amount required $15,000 $15,464 $16,305
Loan origination fee $0 $464 $1,305
Total funds received $15,000 $15,000 $15,000
Payment term 60 months (5 years) 60 months (5 years) 60 months (5 years)
Interest rate 9% 9% 9%
Monthly payment $311.00 $321.00 $388.00
Total interest paid $3,682.52 $3,796.43 $4,002.90
Total cost of borrowing

(interest plus fee)
$3,682.52 $4,260.43 $5,307,.90

Lender fees can add significantly to the total cost of borrowing.

What is the purpose of an origination fee?

Loan origination fees are one way that a lender earns money on a loan. A loan origination fee may cover administrative fees, verification or credit check, or other processing expenses. Loan origination fees are only one type of fee. Other fees can include late fees or prepayment penalties.

Do all personal loans have origination fees?

Not all personal loans come with loan origination fees. Before applying for a personal loan, you can compare lenders on fees, interest rates, and other factors. Many lenders do charge origination and other fees. Discover® Personal Loans never charges fees as long as you pay on time.

Why should you avoid origination fees, if possible?

Choosing a loan without origination fees can:

  • Lower the cost of the loan and save you money on interest.
  • Allow you to borrow the full amount of the loan you need without paying any additional fees.

That means that even if a loan has a slightly higher interest rate, you could still save money overall if it doesn’t come with fees.

A lender may offer you a loan with a lower interest rate. But if there is an origination fee of 8%, you may end up paying more in interest. That’s why a loan with a lower rate can actually be more expensive than one with a higher interest rate.

When comparing loans from different lenders, you should always review Annual Percentage Rates (APRs), not just interest rates.

APRs factor in upfront fees such as origination fees and must be disclosed by all lenders. Whenever a lender charges origination fees, the result is an APR that is higher than the interest rate used to calculate the monthly payment.

The bottom line

To get the best deal on a personal loan, look for one where the only additional cost you pay is the interest on the loan. This also helps you ensure you receive the exact amount you need to cover your home repair or other expenses.

Since Discover Personal Loans never charges you an upfront fee, the Annual Percentage Rate (APR) is simply the same as the interest rate. 

Other lenders may offer a lower interest rate. But if they charge an origination fee, the APR will be higher and will reflect the true cost to you.  So always compare APRs to make sure you’re not missing any hidden costs.

Fees and other costs are not always obvious. That’s why it’s important to read your personal loan agreement carefully. If you’re feeling overwhelmed by the details, let us help you understand the fine print so you can be confident in your decision.

Read More about Personal Loan Agreements

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