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Personal Loan Origination Fees

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What Is a Personal Loan Origination Fee?

An origination fee is a one-time fee charged by some lenders to originate (or begin) a loan. It is meant to help the financial institution cover the costs of processing the loan application and setting up the loan. They are most commonly encountered when applying for a mortgage, but consumers may also come across origination fees when applying for other financial products such as personal loans.

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Learn More About Personal Loan Origination Fees

Origination fees may be referred to by other names including administration fees, underwriting fees, processing fees, or document preparation fees. In the mortgage lending process, you may also hear these fees referred to as points.

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What is an origination fee?

Origination fees help lenders build a larger profit margin to help guard against consumers who may be at risk of defaulting on their personal loans. This buffer allows them to extend credit to those who may not be able to qualify based on their own creditworthiness and it also allows lenders to lower their interest rates in order to remain competitive.

How are personal loan original fees determined?

Personal loan origination fees are determined by the financial institution where you apply for your loan and will vary from lender to lender. Whether or not you have to pay an origination fee will depend on a few different factors.
They are usually set by the lender as a percentage of the loan amount (although flat fees are possible) and typically range from between 1% to 10%. There are a few factors that determine the origination fee you will pay, such as your income, credit score, and the loan amount. For example, having a good credit score can earn you a loan with no origination fees at all. Borrowers can even apply using a cosigner to act as assurance that you will repay your loan.
In some cases, origination fees can be negotiable, although this is more common for mortgages than for personal loans. While it never hurts to ask, you may have better negotiating power with your own bank or other financial institution than with any other personal loan lender.

What does the origination fee consist of?

The origination fee consists of all the different costs involved in handling your application for financing. Origination charges on your loan paperwork may include administration fees, underwriting fees, processing fees, and document preparation fees. The origination fee should cover everything from the personnel involved in the underwriting process to the steps the bank must take after loan approval in order to distribute your funds. You may see these fees broken down into smaller, more detailed fees, or you may see a single charge for an origination fee.

How much are personal loan origination fees?

While there is no set number for how much origination fees cost, you can get a general idea of how much you may expect to pay by doing a little bit of research and even getting prequalified.
Personal loan origination fees are typically a percentage of the total loan balance, although they may be charged as a flat rate in some cases. The typical personal loan origination fee is between 1-10% of the loan amount. This cost can vary widely from lender to lender, and some financial institutions will not charge origination fees at all. Loan origination fees may be higher for borrowers with poor credit or a high debt-to-income ratio at the time of their application.

When do you pay the origination fee?

One thing you might be wondering when you see a hefty fee like the origination fee is when you might be expected to pay this fee and all of the other charges associated with your loan.
Unlike other fees that are paid later on, typically, the origination fee is paid at the start of the loan and may be added to the total loan amount. You should not have to pay the origination fee until the point at which your loan application has been approved and you have accepted the loan offer. You can pay for these fees upfront or they can be financed and paid for overtime.

How do you pay the origination fee?

Most of the time, the origination fee is built into the structure of the loan and therefore it is paid off over time as you make your monthly installment payments. The fee can be taken out of the funds that you receive, or it may be added to the total loan amount at the start of the loan.
For example, if you are borrowing $10,000 with a 5% origination fee, you should be charged $10,500 to cover the cost of both the loan amount and the fee. Or you will receive just $9,500 with the $500 taken out of the cost of the loan upfront. Either way can be a very convenient option for the quick and easy repayment of your origination fee.
However, in some cases you may be able to pay the fee out of your own pocket at the start of the loan, avoiding the need to increase your total loan amount. If paying upfront is something that you might be interested in, be sure to check with your lender to see if this is possible. If you know the origination fee will be deducted from the principal loan amount, you may need to borrow more money. For example, if you need $10,000, but there is a $500 origination fee, you may only receive $9,500.

Can you negotiate the origination fee?

While negotiating an origination fee is much more common in a mortgage application, you may still be able to cut a deal on your personal loan's origination fee. If you have good credit, a very high income, or other positive factors on your application, it may give you more room to negotiate. Likewise, you will likely have more negotiating power with your own bank or credit union than with an anonymous online lender. The best way to negotiate your origination fee is to call your lender directly and ask for a break on the fee. It is important to shop around and read all your loan terms and conditions thoroughly to avoid paying any unnecessary loan fees.

Can you avoid origination fees?

Yes, it is possible to avoid origination fees and there are a few ways that consumers can do so.
The easiest way to avoid origination fees is to find a lender who does not charge them in the first place. For example, banks and credit unions are far less likely than online lenders to charge these fees. There are a number of online lenders that advertise the fact they charge no origination fee. Getting prequalified is a great way to find out how much you can expect to pay.
Alternatively, you can look for promotional offers that waive the origination fees or you can call the lender directly and negotiate a deal. Lastly, adding the origination fee into the cost of the loan can help you absorb this cost instead of paying it upfront, which may be the next best thing to avoiding paying it altogether.
Having a good credit score and a low debt-to-income ratio can also help consumers avoid origination fees. Some lenders only charge these fees to those borrowers who they consider a high risk. If you do not have good credit or an acceptable DTI ratio, you may still be able to avoid paying origination fees by applying for your loan with the help of a cosigner who does.

Why is the loan origination fee so high?

Loan origination fees are meant to cover all of the personnel and operating costs of processing your loan application. Aside from interest, fees are one of the main ways that banks and other financial institutions are able to make money on lending money. Loan origination fees are charged as a percentage of the loan amount, so your fees will be high if your total amount borrowed is high. For example, if you borrow $100,000 and your origination fee is 10%, you will need to pay $10,000 in origination fees. On the other hand, if you borrow just $10,000 and your origination fee is 1%, then you will only need to pay a fee of $100. It is important to keep in mind that borrowing more money than you need to can lead to a higher fee than necessary.

How can I lower my loan origination fee?

You may be able to call your lender directly and negotiate a reduction in your loan origination fee. To increase your chances of success, it helps if you have a high credit score, good income, or if you have done business with a particular financial institution before. In general, if you are an existing customer in good standing, lenders will be much more likely to be willing to negotiate with you.
As with any financial product, in order to get the best deal you must shop around. Consumers who plan to get prequalified before applying for a loan will have the best luck at finding a loan product with the lowest possible origination fee. In some cases, you may be able to avoid these fees altogether. Origination fees are actually much more common from online lenders than they are from traditional banks and credit unions, so if you keep this in mind when comparing fees and other loan terms, you should be able to save money on your origination fees. There are many online lenders (like LightStream and SoFi) who don't charge any origination fee at all.
Lastly, since the amount of the origination fee you will pay is largely determined by how much money you owe, selecting a smaller loan amount is better for improving your origination fee. Be sure that you are only borrowing the amount that you need and that you can expect to be able to comfortably pay back.

What are other fees associated with personal loans?

A personal loan can help you pay off debt, finance a trip or other large expense, or complete major home repairs. However, it is important to understand the various costs that can be associated with taking out a personal loan. In addition to origination fees, there are a few other types of charges to look out for. Other fees associated with personal loans may include early payoff fees, annual fees, late payment fees, and interest. All of these fees can really add up, so be sure to shop around before applying for a new personal loan. In the case of selecting any type of financial product, it really pays to do your research.

How your loan origination fee is determined

Loan origination fees are determined by the lender and this process can take several factors into consideration including your credit score, income, loan term, and total loan amount. For example, if you have good credit you may be able to avoid paying an origination fee altogether.
The amount that you can expect to pay for your loan origination fee can vary widely from lender to lender. In general, banks and credit unions are less likely to charge origination fees while online lenders are more likely to hit consumers with these hefty fees. Although, some online lenders do not charge origination fees at all.

Is paying an origination fee worth it?

Paying an origination fee is worth it if you are unable to find a similar financial product elsewhere that you can qualify for. However, you will want to avoid taking out a loan that has a very high origination fee, if you can. Since there are so many lenders today who don't charge any origination fees at all, it doesn't make good financial sense to shell out 10% or more for a personal loan with a high origination fee if you don't have to
On the other hand, if you find a good deal on a loan online that charges a 3% origination fee with 9% interest and are comparing your loan offer to a personal loan from your local bank that charges no origination fee but has a 16% interest rate, it may wind up costing more in the long run to choose the loan with no origination fee. In this case, paying the origination fee would be worth it. You must take the entire cost of the loan into consideration when comparing offers.

Do all personal loans have origination fees?

The short answer is that, no, not all personal loans have origination fees. The reason for this is that not every lender charges an origination fee. In addition, your own personal credit history or income may cause you to qualify for a promotional offer that avoids these fees altogether.
Lenders who do charge origination fees often do so as a way to protect against at-risk borrowers and increase their profits. Charging these fees also allows lenders to lower their interest rates and generate more business by advertising those competitive rates. This is because they are recouping their costs on the interest rate by charging an origination fee.
On the other hand, many lenders (especially online lenders), are doing away with these fees altogether in an attempt to stay competitive. For example, the following online lenders do not charge an origination fee and offer generous loan amounts with flexible loan terms for those who meet their income and credit score requirements.

LightStream

LightStream is a top-rated online lender that can offer some of the most competitive terms. LightStream provides a streamlined online personal loan process featuring zero origination fees.
Loan amount: $5,000 – $100,000
Minimum credit score: 660
Minimum income: $50,000/annual
APR: 6.99% – 16.94%
Term: 2 – 12 years
Origination fee: None
Funding time: As soon as one business day (funding times may vary)

SoFi

SoFi may have slightly higher rates and more strict credit score requirements, but they are still an online lender you should consider. SoFi can offer competitive loan terms with no origination fees.
Loan amount: $5,000 – $100,000
Minimum credit score: 680
Minimum income: $50,000/annual
APR: 5.99% – 20.94%
Term: 2 – 7 years
Origination fee: None
Funding time: As soon as one business day (funding times may vary)

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