Jul 11, 2024
A loan origination fee is a one-time, upfront fee charged by some lenders for processing a loan. It is sometimes called a sign-up fee or an upfront fee.
A personal loan may be a great way to consolidate higher-interest debt or pay for an unexpected expense. It is important, however, to understand personal loan origination fees and any other costs that could be involved.
Any additional fees beyond the interest rate can increase the total cost of a loan. When you take out a loan with an origination fee, this can mean you’ll get less money upfront or may have to pay more interest over time.
While many lenders charge fees, not all of them do. So it may be worth your while to shop around and find a lender that doesn’t charge any fees.
Get the details about loan origination fees and why it pays to avoid them.
What is an origination fee on a personal loan?
A loan origination fee is charged as a percentage of the total loan amount. For instance, for a $10,000 loan, a 5% origination fee would be $500.
The origination fee is deducted from the total amount borrowed. This means that when the loan is funded, the fee will be subtracted from the funds before you receive them. So you actually get less money sent to you than you applied for. You’ll have to apply for enough funds to cover the origination fee to get the net amount you need from your loan. Remember, you will still have to repay (and pay interest on) the full loan amount.
For example, let’s say you need $10,000 for a home repair. If your $10,000 loan comes with a $500 origination fee, you would receive $9,500 after the fee was deducted. To get the full $10,000 with a 5% origination fee you would need to borrow $10,527. You’ll pay interest on the full amount, including the fee. A larger loan amount means that you will pay more in interest over time.
How much are loan origination fees?
Loan origination fees can vary depending on the lender. Loan origination fees usually range from 1% to 8%, but some can go higher.
Because loan origination fees are based on a percentage of the total loan, a larger loan amount will also increase the loan origination fee.
How do origination fees affect the total cost of a loan?
A loan origination fee decreases the total funds you receive. It may also increase the total cost of the loan, making your annual percentage rate (APR) higher than your interest rate.
To see how this works, consider the example of a $15,000 loan and look at how different loan origination fees affect the cost of the loan.
If you borrow $15,000 and the loan includes a 3% ($450) origination fee, you will get only $14,550 ($15,000 – $450). So, if you wanted to get the full $15,000, you would actually need to borrow $15,464. The lender would take the $464 fee upfront, but you would have to pay back $15,464, including interest on the total.
These extra costs can add up quickly, especially when the loan origination fee is higher.
Here is a quick comparison of how different loan origination fees affect the total cost of borrowing when the loan amount and interest rates are the same:
| No Fee | 3% origination fee | 8% origination fee | |
|---|---|---|---|
| Desired loan amount | $15,000 | $15,000 | $15,000 |
| Total loan amount required | $15,000 | $15,464 | $16,305 |
| Loan origination fee | $0 | $464 | $1,305 |
| Total funds received | $15,000 | $15,000 | $15,000 |
| Payment term | 48 months | 48 months | 48 months |
| Interest rate | 13.99% | 13.99% | 13.99% |
| Monthly payment | $410 | $423 | $445 |
| Total interest paid | $4,671 | $4,816 | $5,078 |
| Total cost of borrowing (interest plus fee) |
$4,671 | $5,280 | $6,383 |
Lender fees can add significantly to the total cost of borrowing.
Why do some lenders charge an origination fee?
Loan origination fees are one way that a lender earns money on a loan. A loan origination fee may cover administrative fees, verification or credit check, or other processing expenses.
What other loan fees should you know about?
Loan origination fees are only one type of fee. Other fees that may affect the total amount you owe include:
- Application fee: This is applied to cover the costs of processing, reviewing, and documenting your loan.
- Late fee: Late fees might be charged if you miss a payment or fail to pay off the loan by the end of the term.
- Prepayment penalty: If you pay off your loan in full before it is due, you might be assessed a fee to cover additional interest payments that would not be made to the lender.
- Annual fee: An annual fee would be applied each year that you have the loan.
Do all personal loans have origination fees?
Not all personal loans come with loan origination fees. Before applying for a personal loan, you should compare lenders on fees, interest rates, and other factors. While many lenders may charge fees to originate your loan, Discover® Personal Loans charges no loan origination fees.
Why should you avoid origination fees?
Choosing a loan without origination fees could:
- lower the cost of the loan and save you money on interest.
- allow you to receive the full amount of the loan without needing to borrow more or pay additional fees.
That means that even if a loan has a slightly higher interest rate, you could still save money overall if it doesn’t come with fees. A lender may offer you a loan with a lower interest rate. But if there's an origination fee, you may end up paying more in interest.
This is why it’s important to compare lenders and review APRs, not just interest rates. APRs factor in upfront fees, such as origination fees, and must be disclosed by all lenders. Whenever a lender charges origination fees, the result is an APR that is higher than the stated interest rate used to calculate the monthly payment.
What should you review when shopping for a loan?
One way to get the best deal on a personal loan, look for one where the only additional cost you pay is the interest on the loan. This will also help to ensure that you receive the exact amount you need to cover your home repair or other expenses.
Since a Discover personal loan has no fees of any kind as long as you pay on time, the APR is the same as the interest rate. This can help simplify your calculations and make your loan experience easier and more convenient. In March 2024, one Discover Personal Loans customer shared their thoughts by saying, “So happy and grateful with my new loan. There are no origination fees and the money was there fast.”*
Keep in mind that fees and other costs are not always obvious. That’s why it’s important to read your personal loan agreement carefully. If you’re feeling overwhelmed by the details, let us help you understand the fine print so you can be confident in your decision.
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