Lenders charge origination fees to process and underwrite your personal loan. This fee gets taken out before you receive your funds, so it affects your total loan amount.
While some lenders will let you bypass this fee, paying an origination fee can occasionally help you qualify for a lower interest rate.
Here’s what you need to know about origination fees (and how to avoid them):
An origination fee is an administrative charge that covers the lender’s expenses for underwriting your loan, which is why it’s sometimes also called an underwriting fee or a processing fee. It’s the lender’s way of recouping some of the cost of processing a personal loan.
Not every lender charges an origination fee. Those that do will typically charge between 1% and 10% of what you borrow. The exact number depends on the lender, but your credit score can affect it, too — some lenders charge higher fees to borrowers with lower credit scores. The fee might also vary depending on the amount you want to borrow.
Related: Learn more about getting a personal loan on Credible.com
Keep in mind that this one-time fee will be deducted from — not added to — the amount you borrow. For example, suppose you want to borrow $10,000, and your lender charges a 3% origination fee: That fee would be $300. You’d receive $9,700 when your loan is paid out rather than the full $10,000.
If the fee was 10% ($1,000), you’d receive $9,000 in loan funds. And if the fee was just 1%, you’d get $9,900. A few percentage points’ difference in fees can mean several hundred dollars deducted from your borrowing costs.
If an origination fee is a hardship for you, you may be able to have it rolled into your total loan amount and pay it off over time. The downside to this option is that you’ll pay interest on the fee as well as the loan. But if you’re struggling with cash flow, this option might be worth it.
Origination fees are also a way to gain a little more control over interest rates. Sometimes, an origination fee can offset a low rate. On the other hand, lenders that don’t charge origination fees might compensate by charging higher rates.
That’s why it’s a good idea to compare fees — not just interest rates — among lenders when you’re loan shopping. Look at the annual percentage rate (APR), which accounts for fees as well as interest. Checking APR lets you do more of an apples-to-apples comparison than you can with interest rates alone.
You can avoid origination fees by opting for a lender that doesn’t charge them or by having a high enough credit score to qualify for loans without these fees. Just keep in mind that you might pay a higher interest rate when you limit yourself to loans without origination fees.
To avoid these fees, look for online lenders, banks, or credit unions that clearly spell out what fees they charge. You can find this information in the “Rates and Terms” section of the lender’s website or in the loan disclosures document the lender provides.
You can also ask your lender if they’ll waive the fee for you. Not all lenders with fees will negotiate like this, but it’s definitely worth finding out.
Fees aren’t the only things to look at when you’re comparing personal loans. Low interest rates, monthly payments, repayment terms, and funding time could make the difference when you’re shopping for the best loan for your needs.
Before you submit an application, consider these other factors when shopping for a personal loan.
Does the lender offer secured loans or unsecured loans? A secured loan will require you to put down collateral, such as a home, a car, or even cash. These loans often come with lower interest rates because the collateral ensures the lender can recoup their funds. Unsecured loans don’t require collateral, but the rates are often higher to make up for the lender’s additional risk that you might default.
Your interest rate will make a big difference in the overall amount you pay for your loan. The average interest rate on two-year unsecured, fixed-rate personal loans was 11.23% in November 2022, but this rate will vary depending on your credit score.
Lenders typically reserve the best interest rates for customers with good or excellent credit. If your credit score is less than stellar, there are personal loan lenders willing to work with you.
You might be able to get a lower interest rate by opting for a shorter loan term, borrowing a lower amount, choosing a secured loan, or selecting a lender that you already have a relationship with. Some lenders also offer lower rates when you borrow with a cosigner or prove you have sufficient savings.
Repayment terms for personal loans typically range from one to seven years, though some lenders may offer longer terms depending on how you use your loan. For example, LightStream offers repayment terms up to 12 years if you use your funds for home improvements.
Keep in mind that the length of your loan term can affect the size of your monthly payments and how much you’ll spend on interest over time. You’ll usually spend less on a loan with a shorter repayment term. This is because you’re paying interest for a shorter amount of time, and rates on shorter-term loans tend to be lower.
However, your monthly payments will be smaller for a loan with a longer repayment term since they’re spread out over a longer period of time. Just keep in mind that you’ll spend more on interest charges over the life of your loan.
How quickly do you need your funds? Some lenders can deposit your loan within a business day or two of approval, while others may take up to a week or longer. Keep timing in mind when you’re comparing lenders.
Your credit score plays a big part in qualifying for a loan and getting a good rate. While most lenders prefer that you have a good credit score (a 670 FICO score or higher), you can certainly find lenders that will work with you if you’re still working to build your credit.
Another tactic is to borrow with a cosigner with good credit. Their credit score and income can help you qualify for a personal loan. Even if you don’t need a cosigner to qualify for a personal loan, having one can help you get a lower rate than you’d get on your own. Just keep in mind that if you’re unable to keep up with payments, your cosigner’s credit will be negatively impacted, as well as your own.
Above all, it pays to shop around. Checking all the possibilities is the best way to find a loan that works for you and helps you reach your goals.
Related: Learn more about getting a personal loan on Credible.com