If one of your personal finance goals is to consolidate debt, make a large purchase, or pay for a major event, a personal loan may offer you a lump sum with a fixed repayment term.
But borrowing money doesn’t come free — you almost always have to pay interest on the balance and there may be upfront fees involved, such as an origination fee.
Here, we explain what an origination fee is, what it pays for, and how much you could expect it might cost you.
What is an origination fee?
A loan origination fee is a fee that a lender might charge a borrower to process a loan. Instead of calling it an origination fee, it may be called an upfront fee, finance charge, or points when buying a house.
Why do some lenders charge this fee? It’s meant to cover the cost of loan-related administrative services. This could include processing your loan application, the work involved in the underwriting process, verifying your income, and the actual funding of the loan.
Below are the typical loan types that might have an origination fee:
- Personal loan
- Home loan (including home equity loans and mortgage refinancing)
- Debt consolidation loan
- Federal student loans
Origination fees work a bit differently with mortgage loans than with other loans. Several fees can fall under the mortgage origination fees umbrella when you buy a home, including application fees, processing fees, and discount points you can buy upfront to get a lower interest rate. These charges collectively are called origination charges and are part of the closing costs.
How you pay an origination fee
There are three common methods for a borrower to pay their origination fee:
- Pay the fee upfront. You pay the origination fee separately and upfront.
- Add the fee to the loan. You may be able to roll the origination fee into the total loan amount you borrow, and then you pay it off in installments as with the rest of the loan.
- Subtract the fee from the loan amount: The origination fee is taken from the loan proceeds before you get the loan funds. This means the lump sum you receive will be less.
The way you pay the origination fee typically depends on the type of loan you’re taking out. When you buy a house, origination fees and other closing costs are generally paid upfront, but you might have the option to add them to your loan. Although this could be easier on your wallet, keep in mind that adding to your loan balance could increase your monthly payment and long-term cost.
For personal loans and federal student loans, the fee is typically subtracted from the loan amount before you get the money. If you’re thinking about taking out a personal loan to renovate your kitchen or pay off high-interest credit cards, you’ll want to make sure you consider fees when deciding how much to borrow.
Examples of origination fees
If you’re planning to take out a personal loan or apply for a mortgage, here’s a look at two scenarios that illustrate how an origination might affect you:
- Personal loan: If you get a personal loan for $5,000 to pay off medical bills and there’s a 3% origination fee, the origination fee would be $150. This fee would likely be paid upfront from your loan proceeds, so instead of getting the full $5,000, you would receive $4,850.
- Mortgage: If you’re buying a home and your loan is $275,000, you might pay 0.5% to 1.0%, which works out to $1,375 to $2,750 for origination charges as part of your mortgage closing costs. Traditionally, homebuyers pay upfront for the closing costs. But, in some cases, you might be able to negotiate to have the seller help you cover some of the closing costs or having the fees rolled into your loan.
How much should origination fees be?
The loan origination fees for a mortgage may range from .05% to 1.0%. In some cases, lenders may offer no-cost mortgages with no lender fees, but that doesn't mean you get off the hook entirely. The loan might instead come with a higher interest rate to make up the difference for the lender when it comes to their loan costs.
Personal loan origination fees generally range from 1% to 8%. If there is an origination fee, it’s usually determined based on factors such as your credit score, your income, and the loan term. Some lenders do not charge an origination fee at all, but you may need a good credit history to qualify.
The government sets origination fees for federal student loans. The current federal student loan fees are 1.057% for Direct Subsidized Loans and Direct Unsubsidized Loans and 4.228% for Direct PLUS loans. Unlike federal loans, private student loans from private lenders may not come with an origination fee. But the trade-off is these loans don’t come with federal loan perks, such as income-driven repayment plans and loan forgiveness.
How to compare loans with or without origination fees
The most important factor to look at when comparing loans is the total cost of the loan. Comparing origination fees alone doesn’t give you an accurate picture of the full cost of a loan because lenders that don’t charge a fee might make up for it by charging a higher interest rate.
- A personal loan of $5,000 with an APR of 8% and an origination fee of 3% will cost $1,082.92 in interest plus a $150 origination fee. That means this loan will have a total in fees of $1,232.92 over a five-year term. The total amount you will pay to your lender will be $6,232.92
- A personal loan of $5,000 with an APR of 12% and no fee will cost $1,673.33 in interest over a five-year term. The total amount you will pay to your lender will be $6,673.33.
In this scenario, a loan with a lower interest rate and a fee would cost you less than a loan with a higher interest rate and no fee. So simply shopping for a loan with no origination fee may not be the best financial deal.
In most cases, lenders have to provide you with loan disclosures that outline the annual percentage rate (also called the APR), the finance charge, the amount financed, and the total payments on a loan. Reviewing this disclosure and comparing terms can help you find an affordable loan.
Can you negotiate the origination fee?
Whether you can negotiate an origination fee depends on the type of loan you’re getting. For a mortgage, you may be able to negotiate lower origination charges, but this could increase your interest rate. For federal student loans, fees are generally set in stone.
For personal loans, you may be assigned an interest rate and origination fee without much leeway for you to negotiate. If you want to avoid the fees, you might be better off seeking lenders who don’t have an origination fee instead of trying to negotiate it down after applying.
Some lenders — such as SoFi and LightStream — offer personal loans without origination fees. Read our SoFi loans review and LightStream review for more information.
Are origination fees and points the same thing?
Yes, the words points and origination fees may be used interchangeably when buying a home. Mortgage points are something you can typically negotiate and they show up as a line item under origination charges on your Loan Estimate and Closing Disclosure forms.
What is the difference between an origination fee and a closing fee?
Origination fees are fees charged by lenders for processing your home loan and are just one of many closing costs you might encounter when buying a house. Other closing costs may include the appraisal fee, title insurance, and more. If you’re taking out a smaller loan — such as an unsecured personal loan, student loan, or debt consolidation loan — an origination fee may be charged, but you won’t have to worry about other home closing costs.
Lenders are in the business of turning a profit. That’s why they charge interest and might also charge origination fees to cover the cost of processing your loan.
If you’re wondering how to get a loan, the best first step to take is pre-qualifying with multiple lenders. This usually doesn’t require a hard credit check and gives you the opportunity to compare multiple loan options. This also applies if you’re looking to refinance an existing loan.
It’s always a good idea to shop around and compare offers before taking out a loan. This will help you choose a loan with the best rate, terms, and fees you can qualify for. Our list of the best personal loans and best mortgage lenders can give you a head-to-head comparison of lenders you might consider.
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