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If you're planning a home renovation project or considering debt consolidation, you may be in the market for a personal loan.
The best personal loans can be amazing financial tools. But if you're not careful, additional costs added on by lenders can catch you by surprise. One expense to watch out for is an origination fee.
Here, we'll break down what an origination fee is and discuss how you can avoid paying more than necessary.
An origination fee is an extra charge some lenders require borrowers to pay. The lender will probably explain that the origination fee covers their "expenses," like processing your loan application, running a credit check, and helping you close on your unsecured loan.
Whether that answer is legitimate is a matter of debate. The fact that some personal loan lenders charge no origination fee, even while offering a lower interest rate, makes the fee feel more like an unnecessary expense than payment for services rendered.
Different lenders have various names for their origination fees, including:
Lenders typically charge the upfront fee by taking it out of the loan amount.
Let's say you borrow $20,000 and the lender charges a 3% origination fee. The lender would take their $600 ($20,000 x .03 = $600) origination fee from the top of your loan and disburse the rest to you. Because of the origination fee, $19,400 would be deposited into your bank account instead of $20,000. Still, you would pay interest on the entire $20,000.
Lenders who require a loan origination fee typically charge between 1% and 8%. On a $20,000 loan, that's between $200 and $1,600.
Due to interest, you actually end up paying more for the origination fee even though you never saw the funds. For example, if the origination fee on a $20,000 loan is 3% ($600) and the interest rate you pay on the entire loan amount is 8% for five years, you will pay a total of $4,332 in interest over the life of the loan. $136 of that total will be interest paid on the $600 origination fee, meaning the fee actually costs you $736.
No, not all lenders charge an origination fee. If you're a borrower with excellent credit, there's no reason to settle for a lender that charges an origination fee. Some personal loan lenders offer fee-free loans. That means no origination fee, no closing costs, no prepayment penalty -- no loan fees at all.
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
Negotiating loan fees is all about having leverage. When you don't need a loan, you have leverage. When you have an excellent credit score and any lender would be glad to have you as a customer, you have leverage. When you are willing to put up something valuable as collateral, you have leverage.
Not all lenders are willing to negotiate fees. If you don't try, though, you're potentially leaving money on the table.
The perfect time to negotiate fees is after the lender has pre-approved your loan application and given you a loan offer. This is also when the lender fills you in on the details of the loan, including:
Once you know that a lender wants you as a customer, it's time to announce that you would like to negotiate the origination fee. If the lender knows that you have excellent credit, they are far more likely to negotiate the fee.
If a lender won't negotiate fees, don't let it bother you. It's only business. Not only are there other lenders to shop around for, but there are also other options to consider. For example:
There are two types of personal loans: An unsecured loan and a secured loan. Here's the difference:
Unsecured loan: An unsecured loan doesn't require collateral. It essentially counts on you to make your monthly payment as promised. If you fail to do so, the lender can sue you, but it can't repossess anything you own.
Secured loan: For this type of loan, you have to have something of value that can be used as collateral. It's the collateral that inspires a lender to take a chance on you -- even if you have bad credit. If you miss payments, the lender can repossess the collateral and sell it to get their money back. The property you offer as collateral must be equal to or greater than the value of the loan amount requested.
Anything that can be sold to pay past-due loan payments may be considered as collateral. Some property commonly used as collateral includes:
If the collateral is valuable enough, the lender may be agreeable to negotiating origination fees.
An excellent credit score can make it easier to negotiate an origination fee. If it's possible to postpone applying for a personal loan, you're likely to be money ahead by increasing your credit score before applying.
If you need the loan now, but your credit score is not quite up to snuff, don't worry. You can make this work. Look for personal loans for bad credit, and borrow only as much as you need.
Personal loans can help your credit score -- by giving you an opportunity to make on-time debt payments. Once your loan is paid off, your score will be higher, and you'll be in a better position to compare lenders.
An origination fee is not necessarily a bad thing and should be weighed against the rest of the loan offer.
Let's say you're borrowing $20,000 for 60 months. Here's a situation in which the lender charging an origination fee is actually the better choice:
Lender A | Lender B | |
---|---|---|
Amount borrowed | $20,000 | $20,000 |
Time borrowed | 60 months (5 years) | 60 months (5 years) |
Origination fee | 3% ($600) | None |
Interest rate | 4.5% | 6% |
Interest paid over life of loan | $2,372 | $3,199 |
Total cost of loan (fees + interest rate) | $2,972 | $3,199 |
In addition, some lenders offer perks, like allowing you to skip a payment after making 12 payments in a row. Before you decide on a particular lender, though, make a list of what each has to offer and compare them side by side.
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
Citi Personal Loan disclaimer:
**Rates as of 05-31-2024. Your APR may be as low as 11.49% or as high as 20.49% for the term of your loan. The lowest rate quoted assumes excellent credit and a loan term of 24 or 36 months. Your APR will depend on a variety of factors including your creditworthiness, term of loan, and existing relationship with Citi. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Loan proceeds cannot be used for post-secondary educational or business purposes.
If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.
Rates quoted are with AutoPay. Your loan terms are not guaranteed and may vary based on loan purpose, length of loan, loan amount, credit history and payment method (AutoPay or Invoice). AutoPay discount is only available when selected prior to loan funding. Rates without AutoPay are 0.50% points higher. To obtain a loan, you must complete an application on LightStream.com which may affect your credit score. You may be required to verify income, identity and other stated application information. Payment example: Monthly payments for a $10,000 loan at 8.49% APR with a term of 5 years would result in 60 monthly payments of $205.12. Some additional conditions and limitations apply. Advertised rates and terms are subject to change without notice. Truist Bank is an Equal Housing Lender. © 2024 Truist Financial Corporation. Truist, LightStream, and the LightStream logo are service marks of Truist Financial Corporation. All other trademarks are the property of their respective owners. Lending services provided by Truist Bank.
*Upstart Loan Disclaimer
The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.