Personal Loans

Understanding Origination Fees

When you take out a loan, you probably expect to pay back more than you borrowed. After all, most lenders charge interest that you pay back with your monthly payments, increasing the cost of your loan.

But loans may also include other charges, including origination fees. Let’s discuss this further.

What is an origination fee?

An origination fee is charged upfront by a lender. It is what a lender receives for processing a loan.

Mortgages, personal loans and students loans may all have origination fees to help cover the lender’s costs.

Make sure to take origination fees into account when comparing loans.

When will I pay an origination fee?

If you are getting a mortgage, you won’t pay the origination fee until closing. Sometimes, origination fees on mortgages are called points. One point equals 1% of the total mortgage.

Some lenders will allow you to roll the origination fees into the amount you’re borrowing, increasing the amount you will pay over time.

We’ll break down three types of loans for which you may have an origination fee.

Personal loans

Personal loans sometimes carry origination fees. It can take time, technology and human effort to process a loan, so lenders may want to be paid for these resources. Origination fees for personal loans can range from around 1% to 8% of the loan.

But many lenders — SoFi and LightStream for example — do not charge loan origination fees for personal loans, so it’s smart to shop around and try to find a lender that doesn’t.

Personal loan lenders deduct origination fees from the total amount you will receive. But there is one exception to seeking out lenders that don’t charge origination fees.

If a lender offers a lower interest rate but charges an origination fee, you’ll want to do the math to determine how much you will save in interest, and whether that amount is greater than the origination fee you would pay.

For instance, if you take out a personal loan for $10,000 at an interest rate of 5.99% for five years, you’ll pay $193.28 a month, or $11,596.80 over 60 monthly payments. That’s $1,596.80 in interest.

Let’s consider the same $10,000 loan with a 3% loan origination fee and a 3.99% interest rate. First, $300 — or 3% — will be deducted from your total loan amount, but you’ll still pay interest on the full $10,000 borrowed.

Thanks to the lower interest rate, you’ll pay $11,047.20 over the life of the loan, saving $549.60 in interest from the first scenario. Factoring in the $300 loan origination fee, you’ll still save almost $250. Do note, though, that if you need the full $10,000, you will need to borrow more money if an origination fee is involved.

Since interest rates can vary, it’s important to shop around and do the math before choosing your best personal loan.

For example, online lender Best Egg offers personal loans with origination fees that may range from 0.99% - 5.99%. LendingClub charges between 1.00% - 6.00%.

Mortgages

Origination fees are much more common when it comes to mortgages. You will pay these added costs at closing.

Most mortgages carry origination fees of between 0.5% and 1% of the loan.

It is often possible to negotiate to have loan origination fees removed. If a lender really wants your business, it may be accommodating.

Origination fees are sometimes called points, but they should not be confused with discount points. Discount points permit you to reduce your interest rate by paying a percentage upfront. Usually, 1 point or 1% of the total loan cost can reduce your interest rate by a quarter of a percentage point. Since mortgage interest is calculated in tens of thousands of dollars, this can reduce your monthly payments and save you money over the life of the loan.

For example, Quicken Loans currently charges two points, or 2%, on a $200,000, 30-year fixed rate mortgage.

Student loans

Student loans issued through the federal government come with loan origination fees. At the time of publication these rates range from 1.062% for direct loans to 4.248% for direct PLUS loans. PLUS loans are available to graduate and professional students or parents of undergraduates.

Most private student loans do not come with origination fees.

How to avoid origination fees

It’s important to consider how much you will pay over the life of a loan, including whether there are origination fees.

Of course, if money is tight, you may not want to pay origination fees on top of other closing costs when you purchase a mortgage.

And if you are taking out a personal loan, you may need every dollar you are borrowing for debt consolidation, a home renovation project or medical bills. In these cases, you’d want to seek out loans with no origination fees or negotiate to have these fees waived.

Be aware: Often, lenders will agree to waive origination fees in exchange for a higher interest rate. If cash in hand is more important to you than saving money over the long term, this may be the best choice for you.

One way to easily compare loan costs is to look at the APRs of different loans. Unlike interest rates, APRs factor in any loan origination fees or other associated costs. By comparing APRs, you can ensure you are getting the best deal on any loan.

The bottom line

Whether you are taking out a student loan, applying for a mortgage or seeking a personal loan to help you cover emergency expenses or your dream cruise, it’s important to consider all the costs associated.

Many lenders offer loans with low interest rates and no origination fees, so you’ll want to shop around to find the best deal based on your credit score, income and other debt you may carry.

 

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