Demystifying origination fees: What they are and how they impact your finances

An origination fee, sometimes called an administrative fee, is a one-time fee that some lenders charge to process and approve loan applications, including mortgages and personal loans. Personal loan lenders may charge between 0% and 12% of the loan amount and deduct the fee from your loan proceeds up front. Whether you’re charged an origination fee and how much usually depends on your credit score and history.

If you have fair or bad credit, you’ll likely pay a relatively high loan origination fee. However, if you have good credit, you may pay a low or no origination fee.

Best personal loans with no origination fee

Not all personal loan lenders require loan origination fees. Some don’t charge them, while others don’t charge them to all borrowers. In either case, you’ll ideally need good credit or better to get approved for a personal loan without an origination fee.

How much are origination fees?

The amount and fee structure can vary when personal loan lenders charge origination fees. For example, here are the origination fee ranges from some popular lenders.

Fees can range from:

• SoFi: 0% to 7% of the loan amount
• Upstart: 0% to 12% of the loan amount
• OneMain Financial: 1% to 10% of the loan amount or a $25 to $500 flat fee
• Upgrade: 1.85% to 9.99% of the loan amount
• LendingClub: 3% to 8% of the loan amount

The origination fee you’ll be charged depends on the lender and how risky of a borrower it deems you to be. You can get an estimate of what a lender may charge you by requesting a personal loan pre-approval or prequalifying for a personal loan. Prequalifying first lets you see what different lenders may offer without hurting your credit score. While this provides you with a loan estimate of how much you may be able to borrow and potential rates, prequalification is not an official offer. Your loan offer, if you’re approved, may be different after you complete the official application.

How it works

Lenders use origination fees to cover the cost of processing your loan and earn revenue. Lenders use this to compensate themselves for the fact that some borrowers will default — this is why borrowers more likely to default are often charged higher origination fees and higher interest rates, which leads to an overall higher APR.

When you apply for a personal loan, the lender will consider your credit score, credit reports, employment history, and income to evaluate your present risk. If the lender determines your risk level is within its allowable threshold, you’ll receive a loan offer, including the loan amount, annual percentage rate, interest rate, upfront fees like origination fees, available loan terms, and monthly payment amount.

Depending on the lender, the approval process may be almost instant with the help of automated underwriting or may take several days if the lender uses manual underwriting or encounters an issue processing your application. Online lenders are likely to use automated underwriting primarily, while traditional financial institutions like brick-and-mortar banks and credit unions may use a combination of automated and manual underwriting. 

Manual underwriting, a careful review by a person known as an underwriter, is often necessary when an applicant isn't automatically approved because they don't meet credit and/or income requirements, or have very limited credit, but may still qualify for a loan.

Origination fee example

If you agree to a personal loan with an origination fee, the lender will typically deduct the fee from your total loan amount before you get it. For example, if you accept a $10,000 debt consolidation loan with a 5% origination fee, the lender would deduct $500 (5%) from your loan upfront and send you the remaining loan balance of $9,500. You’d then repay the full $10,000, plus interest, over your assigned loan term.

Origination fee pros and cons

While origination fees may seem undesirable, they’re not all bad news. Here’s a look at their benefits and drawbacks.

Pros

• More flexible eligibility requirements: An upfront fee enables lenders to approve loans for bad-credit borrowers who might otherwise be denied.
• Taken out of the loan amount: While an origination fee can be expensive, you don’t have to pay it out of pocket. Lenders typically deduct any origination fee from your loan proceeds.
• Better credit pays off: The better your credit and the stronger your application, the lower your origination fee.

Cons

• Lower loan amount: Origination fees reduce the loan amount you receive, but you’re still responsible for repaying the full amount over the life of the loan.
• Increases overall cost: An origination fee increases the overall cost of a personal loan.
• High costs: The fees can be expensive if you fall on the lower end of the qualification spectrum.

It’s also worth noting that some lenders, such as SoFi, offer the option of paying an origination fee in exchange for a lower interest rate. Going this route could potentially lower your overall costs.

How to avoid an origination fee

You can avoid origination fees by applying with lenders that don’t charge them, such as Discover, LightStream, and PenFed. However, you’ll typically need at least fair-to-good credit to qualify. You may also be able to avoid an origination fee if a lender has an origination fee range that starts at zero and you’re very well qualified.

The importance of APR

The federal Truth in Lending Act (TILA) requires all personal loan lenders to communicate the costs of their loans in terms of APR. Loan rates and fees often differ between lenders, but the APR provides a way to easily compare loan costs at a glance.

The APR represents the annual cost of a loan and accounts for the interest rate and any upfront fees. If a loan charges no upfront fees, its APR and interest rate will be the same. You can even calculate the APR for a loan that charges fees instead of an interest rate. For instance, some rent-to-own lenders charge fees instead of interest rates. 

Bottom line: Comparing APRs — especially for no-interest loans — is a good way to ensure you get the best deal.

FAQ

Do all lenders charge origination fees?

Not all lenders charge origination fees. For example, LightStream and Discover don’t, and SoFi makes origination fees optional. Plus, many lenders charge origination fees, but not to all borrowers. Different loan options from the same lender may have different fees. Your creditworthiness determines your risk as a borrower, whether you'll be charged any fees, and how high your interest rate will be.

When do you pay an origination fee?

An origination fee is paid at the outset of the loan. In the case of personal loans, lenders often deduct the fee from the loan amount and send you the remaining amount. However, you’re still required to make payments based on the full loan amount.

What are other personal loan fees?

Along with origination fees, personal loan lenders may charge application fees, prepayment penalties, late-payment fees, non-sufficient funds fees, and missed-payment fees. Fee schedules vary from one lender to the next.