Once you start looking into getting a personal loan, you’ll soon see that it can help you consolidate debts, pay for a vacation or major purchase. When you apply for a personal loan, you may realize that you are being asked to pay loan fees, such as a loan origination fee, in addition to interest. While the idea of paying interest is probably familiar, you may wonder: What is an origination fee? And why should I pay it?
Those are good questions for any consumer who wants the best deal on a personal loan. To start with answering the first question, a loan origination fee can be defined as 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.
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. 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.
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 charges and fees. 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.