Some lenders may charge an origination fee when you borrow from them with a personal loan to fund your loan. It is important when you are comparing the lenders, to know what those fees are paid for and how they work.
Although loan origination fees for a personal loan is not charged by all lenders, you may sometimes feel like choosing a no-fee option, an upfront charge can be paid so you could come out ahead. Shopping around and comparing critical loan features are the only way to know.
Loan origination fee definition – What is an origination fee?
An origination fee is the money that you pay to your lenders when funds are received by you.
The money is used as compensation for your lender for the expenses like marketing and processing of your application. The fees normally range from 1 – 8% of the total money you borrowed. Although a flat fee can also be paid, while you may even not be charged at all, it all comes down to the type of lender yo/u are dealing with.
Let’s take for instance, that you borrow $10,000 and the origination fee for the loan is 2%, it means you’ll pay an origination fee of $200. Most times, the fee is deducted from your loan before you are paid so the lender pays you $9,800.
How origination fee works
When you pay ‑ The origination fees are paid only when your loan is approved and funded. Although other “credit check” or “loan application” fees may have to be paid either your loan is approved or not, but origination fees shouldn’t be paid if your loan application is not granted.
How you pay – The origination fees are not paid in many cases, it is deducted from your loan only when you are approved. This is why it is always better to borrow what can cover both your needs and the origination fee. In other words, borrow a little more than what you need so as to cover the origination fee.
What you are paying for – Origination fees are like compensation to your lender. Although the lender also charges interest, which is another form of compensation, it gets it over time while the origination fee is instant. Your loan might not be very profitable for the lender if you pay off too quickly, who may have to use other fees to generate revenue.
Upfront costs are covered by origination fee, such as:
- Income verification with the National database.
- Cost to check your credit with the credit bureau and other sources.
- Application review to help in determining whether the loan should be approved or not.
The loan period, loan amount, presence of a co-signer, your credit history, and the purpose of the loan are all used in determining the origination fee.
Should the origination fees be paid?
The assumption of loans without an origination fee are best shouldn’t be taken seriously. Offers from different lenders should be evaluated and the best option with the perfect picture in mind should be chosen.
Is there a strategy? – As a general rule of thumb, the quicker you plan to service or pay off your loan, less it makes any sense to pay an origination fee. If high-interest rate debts are consolidated with a personal loan and the balance is intended to be paid off within the next 12 months or thereabout, an upfront payment may be too expensive since you don’t benefit anything from a very long low rate.
Interest rate – The interest rate of a loan is very important. If by paying an origination fee, a low-interest rate can be secured, less could be paid overall. Although some numbers need to be run so as to understand how your costs work. Online calculators and spreadsheets can be used to calculate costs so as to get specific numbers for any loan you want to evaluate.
Loan features – Every detail about the loan you are considering should be investigated and how that loan will fit your needs should also be determined. For instance, if your plan is to aggressively pay off your debts, then a loan t5hat has a prepayment penalty might not be the best option for you. Although that penalty can be compared to the origination fee on a competing loan and the least costly option should be chosen.
Compare the APR – A lowest-cost loan can be chosen with the help of the loan’s annual percentage rate, APR. The total cost is explained by the APR, including the interest rate and any other required fees like the origination fee. The calculation of APR isn’t always correct, but it is the best way to get a head-to-head comparison.
Check your numbers – The effect of the origination fee can be calculated, your numbers should be checked with an origination fee calculator in google sheets.
Origination fees aren’t usually want to be negotiated by lenders. Although you can ask, but the best bet is to find a different lender if you aren’t happy about the origination fee.
Choosing the best
If you are comparing 2 loans and one has an origination fee, the best approach to know which is the best is to use a breakeven analysis. The fastest form of breakeven shows you how quick it is to recover the money you spend on the origination fee (if a lower monthly payment is the result of those fees).
If the loan is planned to be kept long enough so as to recover the origination fee, it may be worth it to pay the upfront charge.
For instance, let’s assume you want to borrow $10,000 with a 7-year loan, and there are 2 offers on the ground:
- Loan A has a 10% interest rate which will result in a $166 monthly payment.
- Loan B has an origination fee of 2% of $200 (assuming this is paid from your pocket to make things easy) and it has an interest rate of 8%, your monthly payment is $155.86.
Which would you consider a better deal? It all depends on the total time taken to repay the loan. The breakeven time can then be calculated by:
- The difference between the monthly payments is $10.14 ($166 – $155.86)
- The difference is then divided into the origination fee which is $200 / $10.14 for a breakeven period of 19.71 months.
If this personal loan is intended to be kept for at least 20 months, then the loan be will be the best, even though it has an origination fee. The total amount of loan on loan B is less than what you pay on loan A, including interest charges and the origination fees. And you also get a monthly payment that is lower.
Your option – Origination fee conclusion
Your borrowing costs can be minimized and the right loan chosen for your needs by understanding the origination fees. And you might be willing to consider lenders who charge origination fees after seeing how it works.
From the above information, offers can be compared from different lenders and make sense of loans with (and without) upfront charges.