A personal loan origination fee is a one-time fee charged by a lender to process your application and disburse funds to your account.
In this article, we’ll discuss how the origination fee on a personal loan works, how it's calculated and how it affects a personal loan’s overall cost. By the end, you should feel much more comfortable comparing different loan offers.
How does a personal loan origination fee work?
Between gathering important documents and filling out the necessary paperwork, applying for a personal loan can be an involved process. This is also true for lenders, who must process your application, answer any questions that may arise and ultimately decide whether you qualify. The origination fee on a loan is what the lender will charge you to complete this procedure.
What does an origination fee consist of?
A personal loan origination fee is not a flat rate. Instead, it’s usually structured as a percentage of the total loan amount. A loan origination fee can be as high as 10%, but for major lenders, fees are typically in the range of 1%-8%.
This means that if you’re applying for a $20,000 personal loan you can expect to pay somewhere between $200 (which is $20,000 * .01) and $1600 (which is $20,000 * .08).
When do you pay a loan origination fee?
In many cases, the loan origination fee will be subtracted from the total value of the loan. If you take out a $20,000 loan and the fee is $1000, you’ll actually receive $19,000 but pay back the full $20,000 (plus interest) over the loan’s lifetime.
In this example, the difference between the total value of the loan ($20,000) and the amount you receive ($19,000) is equal to the loan origination fee.
How do you pay a loan origination fee?
If your personal loan and the personal loan origination fee are set up in the way described above, there won’t be a separate step where you pay the fee. The amount you receive will already have the fee subtracted, so you only need to worry about making payments on time.
Importantly, you should probably account for this fact when deciding on what size loan you need. If you’re applying for a $20,000 loan but you only get $19,000 because there’s a 5% loan origination fee, that means you might be left in a tough spot if you need the full $20,000.
Modifying your loan request to account for the loan origination fee is relatively straightforward. You just need to divide your original loan amount by 1 minus the fee’s percentage.
So, if you need $20,000 and there’s a 5% fee, divide $20,000 by 1-.05, which is .95. In this example, to secure a full $20,000 you actually need to ask for $20,000/.95, or $21,052 (you’ll probably want to round this up to $21,100).