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How to Decide If a Student Loan Origination Fee Is Worth Paying
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So you need to borrow money. Maybe you’re refinancing student loans, consolidating credit card debt or financing an urgent purchase.
In any case, you’ll need the cheapest loan you can get. You’ll also need to know the answer to the following question: What is an origination fee?
Along with interest rates, origination fees are a factor that could quickly increase your borrowing costs. To find your best deals on a student loan, you’ll want to figure out what an origination fee is — and when it is worth paying.
Let’s look at how to do this by answering the following two questions:
Simply put, a lender charges origination fees for processing a loan application and agreement. The loan fee covers the lender’s costs of underwriting a loan, pulling the borrower’s credit and verifying identity and documents.
An origination charge is a common cost on several types of loans — such as car loans, personal loans or mortgages — and is typically a percentage of the total amount borrowed. For example, federal student loan fees are 1.059% or 4.236% for loans disbursed after October 1, 2019 but before October 1, 2020, depending on the loan type.
Most lenders will determine the origination fee based on the borrower’s creditworthiness. So if the lender sees you have a less-than-perfect credit history or otherwise deems you’re a riskier bet, you’ll likely pay a higher origination fee.
Different lenders will have their own policies on how they charge an origination fee. For instance, some will roll it into the loan’s balance. In this case, if you have a $10,000 personal loan with a 4% origination fee, your final balance with the fee added in is $10,400.
Other lenders will deduct the origination fee from the disbursed funds, so for a loan balance of $10,000 with a 4% fee, the borrower would only receive $9,600 of the funds — that’s because the lender takes out the $400 origination fee.
Sometimes, a borrower might be required to pay an origination fee outright, with cash, instead of adding it to the loaned amount. This is most common with a mortgage and is typically included in the homebuyer’s closing costs. (An origination fee can be rolled into the loaned amount, but that may result in a higher interest rate.)
Loan applicants should watch out for advance-fee scams, however. These scams promise or guarantee a loan, even for bad credit, but charge high origination fees or have hidden costs.
The Federal Trade Commission (FTC) warns borrowers to be diligent. Research lenders and fees to avoid advance-fee loan scams.
Because an origination fee adds to your total costs when borrowing, it’s important to factor this into your choice. Although the terms are sometimes used differently, an interest rate quote does not include any fees, while an “annual percentage rate” (APR) does factor those in.
On top of comparing terms and interest rates, you’ll also want to cross-check origination fees to ensure you’re getting your best deal.
With certain loan types or lenders, it’s possible to find a loan with no origination fee.
Among our top lenders for student loan refinancing, for example, none charge an origination fee. Some of the lenders we work with also offer no-fee personal loans.
If you want to get a personal loan with no fee, you simply have to choose a lender that doesn’t charge one, like SoFi or PNC Bank. If you can qualify for a personal loan with a no-fee lender, you could save big-time.
However, a no-fee loan may not always be cheaper. One way or another, a lender will have to cover the costs of originating a loan. And if it doesn’t charge an origination fee, those costs could be rolled into other loan costs, primarily the interest rate. Because of this, it’s possible you could end up with a loan that will cost you more than one with a fee but also a lower rate.
You’ll definitely have to do some legwork and compare costs and find the loan that is truly the best deal for you, including rates and origination fees. To really know how much your costs will be, you need to get some loan offers from different companies, then compare the total costs on an APR basis.
Luckily, many lenders use a “soft credit pull” to evaluate your creditworthiness, which will allow you to get multiple loan offers without adversely affecting your score. Pick some lenders that look most promising, and apply for preapproval for a loan. Once you have a few offers in hand, you’ll want to compare a few key items — these include the APR of loans with similar terms, and whether or not they have origination fees.
Depending on the different terms offered, you’ll need to compare the rates along with the origination fee to find which offers your best deal.
For example, maybe you have three loan offers to borrow $10,000 over five years:
- Offer No. 1 has a proposed interest rate of 4.99% with a 3% origination fee
- Offer No. 2 has no origination fee but a rate of 6.27%
- Offer No. 3 has a 1.5% origination fee with a 5.65% rate
Which is your best deal? You can consult our APR calculator to turn fees and interest rates into all-inclusive APRs — though like with any online calculator tool, there can be bugs or input mistakes, so you’ll still definitely want to request the exact APR (with fees included) from the lender.
If you crunch the numbers, it turns out that the actual APRs with the origination fees included are as follows:
- No. 1 – 6.25% APR
- No. 2 – 6.27% APR
- No. 3 – 6.28% APR
As you can see, loan No. 1 has the lowest APR when origination fees are included. Note too that the longer your loan’s term is, the more likely it is that the initial cost or an origination fee would be worth paying.
Depending on what you’re looking for a loan, you might choose one that’s not necessarily the lowest-cost option. Maybe you’re willing to pay an origination fee to get a lower monthly payment.
Maybe you have less-than-perfect credit, and the loans you qualify for all require an origination fee. Many lenders with less-strict credit requirements will also include an origination charge. Paying this fee could be unavoidable if you need the loan.
If you know what’s important to you in a personal loan, you can weigh an origination fee to decide on your best option. It can add to your loan costs.
However, you may also find that this fee is worth paying if it gives you access to the financing you need. The only way to know for sure is to research your options and take your time choosing a loan and lender that’s right for you.
Christina Majaski contributed to this report.