Simply put, a loan origination fee is a charge that a lender charges the borrower for the loan. It’s a one-time fee commonly calculated as a percentage of the loan. For instance, a 5% origination fee on a $10,000 loan would be $500.
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 as high as 10%.
Moreover, the origination fee is usually deducted from the total amount of funds that you receive from the loan.
Let’s go back to our example of a 5% origination fee on a $10,000 loan. If the lender charges a 5% origination fee, you’d receive net $9,500 instead of the full $10,000. So, if you need $10,000 in funds, you’d have to adjust the loan amount you apply for to account for the origination fee.
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 getting a personal loan, the only cost you should pay is the interest on the loan. Avoiding upfront 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, closing costs, or prepayment penalties, making it easier for you to focus on planning for your financial future. There are no fees at all as long as you pay on time.
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