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Everything You Need to Know About Origination Fees on a Personal Loan

What Is an Origination Fee on a Personal Loan?
Austin Kilham

Austin Kilham

Updated February 24, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When you take out a personal loan, your lender may charge you an origination fee to offset some of their costs. Understanding what the origination fee is, the effect it will have on your loan amount, and how to pay it will help ensure you’ll get a loan that works for you. Let’s take a look at the loan origination fee definition below. 

What Is a Personal Loan Origination Fee?

Lenders offer all types of personal loans, from secured loans with collateral to unsecured loans like signature loans. When you apply for one of these loans, the personal loan origination fee helps lenders defray the costs of processing your loan application, including the time and effort it takes to underwrite the loan and prepare any necessary documents. Loan underwriting is the process by which lenders determine how risky it is to offer you a new loan, whether it’s an unsecured personal loan or a loan with collateralThe fee represents a one-time charge to the borrower, and it may be due upon closing the loan or included as part of your loan balance to be paid off each month. 

How Much Does a Loan Origination Fee Typically Cost? 

Origination fees will vary by lender and by each borrower's personal financial situation. Some lenders charge a flat fee for an origination fee personal loan, while others will charge a percentage of your total loan amount. These fees usually range from 1% to 5%, but they could go as high as 10%. The fee is usually included in the total loan amount. For example, if you are looking at a $10,000 loan with a 5% origination fee, you’ll be charged $500 — leaving you with $9,500. You will still be charged interest on the $10,000 total, however. And be mindful, if you need the exact amount of $10,000, you’ll actually need to take out a bigger loan to ensure the origination fee is also covered.  

How Is a Loan Origination Fee Usually Determined? 

There are a number of factors that lenders use to determine your origination fee loan. Here’s a look:

Credit Score 

Your credit score is one of the first factors lenders will look at when determining whether or not to extend credit to you. The lower you score, the more risk you represent to the lender. Charging a higher origination fee is one of the ways lenders will offset that risk. So, while someone with an excellent credit score might be charged a 1% origination fee, someone with poor credit might be charged a much higher rate. 

Size of Your Loan 

Your personal loan amount will always have an impact on the amount you pay for an origination fee — unless you’re paying a flat fee. Because you’ll likely be charged a percentage, the bigger your loan, the more you’ll be on the hook for. 

Assets and Liabilities 

Lenders may look at your assets and liabilities to help them assess risk for an origination fee personal loan. The more debts you carry, the more risky you may be in their eyes. Perceived risk likely translates to higher fees. The more assets you have, the more likely you may be to make your loan payments on time.  

Total Income

The higher your income, the less your origination fee may be. Again, this is because the more money you have coming in each month, the more confident your lender will be that you’ll pay off your loan on time. 

Do All Personal Loans Have Origination Fees? 

Not all lenders will charge an origination fee, and they have the power to waive them. Loans without origination fees may be built for borrowers with the best credit. Also, beware that if a lender doesn’t charge a fee, they may be making money in some other way. For example, they might charge a higher interest rate. 

Do You Have to Pay the Origination Fee? 

If your lender offers an origination fee personal loan, you do not have to accept the offer. You can, and should, compare loans from other lenders to make sure you’re finding the best deal available. If you want to accept the offer for an origination fee loan, however, you’re going to have to pay the fee.That said, fees are negotiable, and you can always ask your lender to reduce your fees. Gather research about what other lenders are offering to help you get the most competitive rates. 

Is Paying an Origination Fee Worth It? 

So, how do you decide whether or not paying an orientation fee is worth it? Well, it’s all about tradeoffs. For example, one loan may charge an origination fee and have a lower interest rate than another with no fee that charges a higher interest rate. By choosing the second option, you may end up paying more money over the life of the loan. 

APR

The annual percentage rate (APR) measures the total annual cost of borrowing, including a loan’s interest rate and the fees. Looking at the APR on loans helps give you an apples-to-apples comparison of total cost to you. The lower the APR on one loan, the less you’ll owe — even if that loan has origination fees while others don’t. 

Other Personal Loan Factors to Consider 

As you compare personal loans, the origination fee isn’t the only factor to consider. When you shop for a loan, be sure to compare these, as well: 

Other Fees 

Lenders may charge a suite of other fees in addition to origination fees, including application fees, late fees, and more. 

Interest Rate 

A loan’s interest rate is the amount a lender charges for the privilege of borrowing money, and it is probably the factor that has the most impact on how much a loan will cost you in the long run. Higher interest rates increase your monthly bill — and the longer your loan term, the more you’ll pay in interest over the life of the loan.

Length of the Loan 

You’ll also want to consider your loan term length, or the amount of time over which you’ll pay back your loan. Look for lenders that offer repayment schedules that work for you. Longer terms typically carry lower monthly payments and higher interest rates, while short term personal loans usually require higher monthly payments, but charge less in interest. 

Caps on Loan Amounts 

Some lenders will put a floor or a ceiling on the amount you can borrow. Look for lenders who offer loans on the amount you need. After all, you don’t want to end up in a situation where you’re unable to borrow enough or you’re forced to borrow more than you need or can afford.  

Compare Personal Loans With Lantern 

Understanding all the costs associated with taking out a personal loan can help you compare loans and find one that fits your needs, budget, and repayment timeline at the lowest cost possible. Find out more about personal loans and compare personal loan rates with Lantern by SoFi.
Photo credit: iStock/Sasithorn Phuapankasemsuk
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1221083

Frequently Asked Questions

What is an origination fee on a personal loan?
Do all personal loans have origination fees?
How much should a loan origination fee cost?

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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