Personal loan origination fees: Are they worth the cost?

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From consolidating debt and paying off high-interest credit cards to making a down payment on a new car, personal loans can be used for almost any reason. But some personal loans come with origination fees that are deducted from your loan amount before you get your funds. These fees cover the costs of processing and funding your loan.

Most personal loans are unsecured, meaning you don’t need to put up collateral — such as your car or home — to qualify. Personal loans often come with competitive fixed rates and terms, depending on your credit. 

Here's everything you need to know about personal loans and why some lenders charge origination fees.

Visit Credible to compare personal loan rates from multiple lenders without affecting your credit.

• What is a personal loan origination fee?
• How much does a personal loan origination fee cost?
• How do I avoid being charged an origination fee?
• Are origination fees worth the cost?
• What are some alternatives to personal loans?

What is a personal loan origination fee?

Paying back the loan amount and interest on your personal loan might not be the only costs you’re responsible for. Many lenders also charge an origination fee, also called an underwriting, processing or administrative fee. 

The origination fee on a personal loan is usually included in the loan’s annual percentage rate (APR), which also includes your interest rate and any other fees the lender charges to underwrite and fund your loan. 

If you're considering taking out a personal loan, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

How to get a $50,000 personal loan

How much does a personal loan origination fee cost?

Origination fees are usually charged as a flat fee or percentage, and typically range from 1% to 10% of your loan amount. For example, if you take out a $5,000 personal loan with an origination fee of 2%, $100 would be deducted from your loan funds.

Several factors determine the origination fee amount, including the amount you’re borrowing, the repayment term, and your credit score. Some lenders also consider your employment history, income and if you’re applying with a cosigner. 

Can you get a personal loan without a credit check?

How do I avoid being charged an origination fee? 

You may be able to avoid origination fees if you have good credit and solid income. When determining your interest rate and other fees to include in your APR, lenders will consider your credit score, income and employment, and other factors such as your debt-to-income (DTI) ratio.

Having good to excellent credit, or applying with a cosigner with good credit, and having a DTI ratio no higher than 40% can help reduce your interest rate and other charges such as origination fees. You can improve your credit score by paying all of your bills on time or paying down your credit card balances, and you can improve your DTI ratio by paying down any existing debt.

If the lender you choose charges an origination fee, there may be ways to negotiate the fee or have it waived entirely. 

1. Price match: Many lenders will modify loan packages and may even price-match. So shopping around for a lender that doesn't charge an origination fee is worth the time, especially if the interest rate is also competitive.
2. Negotiate terms: Know what you're paying and negotiate with your lender to reduce the fee or waive it entirely. Not all lenders will negotiate terms, but it never hurts to ask.
3. Use your banking relationship: If you’re a long-time customer of a bank or credit union, you may be able to get origination fees waived altogether. Banking institutions like to keep their best customers happy as it’s more profitable in the long run.

When shopping around for a personal loan, be sure to compare as many lenders as possible to find the right loan for your needs. Be sure to check if the lenders you’re considering charge origination fees before applying.

5 different types of personal loans you should consider

Are origination fees worth the cost?

That depends. When you don’t pay the fee, you’ll get the full loan amount you were approved for. But if your lender subtracts the origination fee from the total loan amount, you may need to borrow a bit more to cover the cost. 

On the other hand, paying an origination fee might result in a lower interest rate, which would lower your monthly payment. Additionally, it may make sense to pay origination fees if you need funds fast, have less than stellar credit or the lenders you want to borrow from charge origination fees.  

Another consideration is the repayment term of the loan. The quicker you plan to pay off your personal loan, the less sense it makes to pay an origination fee. 

You can use Credible’s personal loan calculator to estimate your monthly payment for a personal loan.

How to get a low-interest personal loan

What are some alternatives to personal loans?

Not certain a personal loan is right for you? Here are some alternatives to consider.   

Credit cards

Credit cards often come with low introductory rates for anyone with good credit history. You may also earn points or rewards. Shopping for a credit card? Visit Credible to find the right credit card for all of your needs.

Personal line of credit

A personal line of credit is like a credit card that you draw on and pay back on a rolling basis. Personal lines of credit may offer higher credit limits than credit cards.

Home equity loan

If you have equity in your home, you can often borrow against the value you’ve built up. A home equity loan functions as a second mortgage that you receive as a lump sum payment. With a home equity loan, your house serves as collateral. While this can be risky, you might be able to qualify for lower interest rates than with a personal loan.

Home equity line of credit (HELOC)

Similar to a credit card, a HELOC provides you with a line of credit you can borrow from as needed. You’ll borrow against the equity in your home, and the loan is secured with your house as collateral. You can borrow as often as you need, up to your credit limit.

401(k) loan

A 401(k) loan is taken out against your retirement account. Rates are usually comparable to personal loans, but you risk losing the money you saved for your retirement if you default on the loan.

Peer-to-peer loan

This type of loan is available on online lending platforms that match borrowers with investors willing to fund loans. The rates and terms are set by the people funding your loan rather than by a financial institution.

Small business loan

If you need a loan to start or finance a business, a small business loan can be a good option. A variety of small business loans are available, including a small business line of credit, which functions similarly to a credit card. You can use these funds as often as you need up to a set borrowing limit during the draw period. The amount you repay during the draw period can be re-borrowed.

Another option to consider is an SBA Small Business Loan, which is financed and regulated by the U.S. Small Business Administration. These loans include 7(a) loans, which can be used to refinance business debt and purchase supplies, and 504 loans, which provide long-term, fixed-rate loans for business growth and job creation.

No one wants to pay more than they have to, but if you want to take out a personal loan, origination fees may be unavoidable. Some lenders don't require origination fees, while others do. One lender may charge a higher interest rate and no origination fee, while one charges an origination fee but a lower interest rate.

Use Credible to compare rates from multiple lenders all in one place.

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