If you’re in the market for a personal loan, make sure you do your research and find a lender that can offer you the best rates. Be sure to read the fine print and ask the right questions to lenders. This will help you choose a loan that is within your budget.
A part of this research and planning is knowing the type of advance payments or fees you’ll be expected to pay, one of which is the origination fee.
While saving money is important and of prime importance, sometimes you take a loan due to circumstances or give yourself a financial push.
So if you’re about to get a personal loan soon and caught someone talking about the origination fee, this is the right place to learn everything you need to know about what it is and how it applies to different loans.
Let’s get straight into it!
What is the loan origination fee?
You may have to pay more than the principal and interest when you borrow money. Some lenders charge an origination fee to cover the costs of processing the loan. This fee could add hundreds of dollars in extra costs to your loan.
Your fee will be based on your credit score and overall financial picture. A loan origination fee is an up-front fee your lender charges to process a new loan application. Lenders use these fees to offset the cost of underwriting and screening a new borrower.
Origination fees, also known as points, are common mortgage charges. Many personal loan lenders do not charge an origination fee, but if they do, these fees can range from 1-8% of the loan amount, depending on your credit score and the length of the loan.
How is the origination fee calculated?
The fee is based on the amount of the loan. If you have to pay a loan origination fee, you can usually pay it either by rolling it into your loan’s balance or by taking it out of the funds you receive.
The amount you’re supposed to pay will be based on several factors, such as:
- Your credit score
- Assets and liabilities
- Your income
Lenders charge origination fees to cover the costs of processing, underwriting, and arranging the loan itself. Fees associated with a loan origination can include a single origination fee or several different charges for every process.
These fees can vary greatly, depending on the lender. Your loan amount, loan type, credit score, and the presence of a co-signer, so there’s no clear estimate unless your lender gives you one.
Can you negotiate the origination fee?
You can negotiate the origination fees and many lender-side fees, so don’t be afraid to ask your lender to reduce them. Reducing origination fees can reduce the overall costs of your loan, especially if you’re using it to buy a house.
There are several other ways to reduce fees if you’re using the loan to buy assets, such as getting a loan with a lower interest rate or asking the seller to contribute to your closing costs. The odds of receiving seller contributions depend on the market in most cases.
If you’re considering a personal loan with no origination fee, consider the loan’s other costs. Lenders still need to make money, so they may be trying to get their money back through higher interest rates or prepayment penalties. Sometimes, the loan with an origination fee is a better deal than the alternative.
Using origination fees to compare different loans
The origination fee often takes money out of your loan proceeds, meaning you may not receive your full loan amount. Still, the benefits of taking out a loan with an origination fee can far outweigh the fee itself.
By comparing loans with an origination fee, you can save money over time and get the best deal possible, so here are three ways you can compare them:
1. Determine the timeline of your loan
Shorter loan terms generally result in lower interest rates. Short-term loans usually have higher monthly payments than longer loans. If you are paying an origination fee on top of your high monthly payments, you tend to opt for a no origination fee loan to keep costs down.
2. Consider multiple options
Make sure you compare rates before borrowing money. Look through the best personal loan rates and find a lender that can give you what you need.
If you’re applying for a loan, ask your loan provider if there is an origination fee associated with the loan. You should also review the loan’s full terms and conditions to ensure there are no hidden costs.
3. Evaluate the APR
The APR on your loan is based on the interest rate, but it also considers other costs, such as origination fees. When calculating the total cost of repaying your loan, do not include the origination fee on top of the APR.
A higher origination fee will result in a low APR, so when comparing two loans with the same interest rate and time limit, your upfront origination fee can help you make a better decision after comparison.
When borrowing money, it’s important to consider all costs, including interest and fees. If you’re not careful, loan origination fees can add hundreds or even thousands of unexpected dollars to your loan.
However, that doesn’t mean you should automatically reject loans with this fee, as they can be generally more affordable than loan options offered by other lenders. Try negotiating the fee and comparing different loans using it as a metric to identify which loans fit your needs and plans!