Personal loan origination fees: are they worth it?
Personal loan origination fees are paid up front when you take out a loan. It may be worth paying a origination fee if the loan has a long repayment period or a lower interest rate. But sometimes the origination fee is not worth the cost. (iStock)
Personal loans are useful for almost all reasons. From consolidating debt to paying off high interest credit cards to getting a down payment on a new car. Most personal loans are unsecured, which means you don’t need any collateral to qualify, and they come with competitive fixed rates, terms and monthly payments.
Sometimes personal loans come with a set-up fee on top of the amount you have to repay. Here’s everything you need to know about personal loans and why some lenders charge origination fees.
What is a personal loan origination commission?
Paying off your personal loan amount may not be the only expense you are responsible for. Many lenders charge a set-up fee, also known as an underwriting, processing, or administration fee.
Much like the mortgage origination fee, the personal loan origination fee is usually included in the annual percentage rate (APR) of the loan and charged by lenders when you take out the loan.
The origination fee is calculated as a percentage of the loan amount, so the more you borrow, the higher the fees. For example, if you take out a $ 5,000 personal loan with a 2% origination fee, you could pay $ 100.
If you are considering taking out a personal loan, go to Credible. Credible can help you find loan rates as low as 4.99% APR and loan amounts up to $ 100,000. Plus, you won’t be caught off guard by any additional fees or charges. See if you prequalify for a personal loan today.
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How much are the costs of setting up a personal loan?
The setup fee is a one-time fee that is shown as a percentage and used to cover the costs of processing your loan application, verifying employment and income, and disbursing funds. The set-up fees range from around 1% to 8% with most lenders.
Several factors determine the amount of the fee, including the loan amount, repayment term, and your credit score. Some lenders also consider your employment history, income, and whether you are using a co-signer.
When you’re ready to buy a personal loan or just want to compare rates, explore all of your personal loan options by visiting Credible to compare lenders.
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How to avoid origination fees being charged?
Not all lenders charge origination fees. But if the lender you choose does, there may be ways to negotiate the fees or have them waived entirely.
- Price match
- Negotiate the conditions
- Use your banking relationship
Price match: Many lenders will change loan packages and may even match prices. So looking for a lender that doesn’t charge a set-up fee is worth it, especially if the interest rate is also competitive.
Negotiate the conditions: Know what you are paying and negotiate with your lender to reduce the fees or waive them altogether. Not all lenders will negotiate terms, but it never hurts to ask.
Use your banking relationship: If you are a long-time customer of a bank or credit union, the setup fee may be waived entirely. Banking institutions like to satisfy their best customers because it is more profitable in the long run.
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Is the origination fee worth the cost?
It depends. When you don’t pay the fees, you get the full loan amount that you were approved for. Additionally, if your lender subtracts the origination fee from the total loan amount, you may want to borrow more than what you need to cover the cost of the fees.
Paying a set-up fee can also cause the interest rate to drop, which would lower your monthly payment. Additionally, it may be a good idea to pay origination fees if you need funds quickly, have below average credit, and / or if the only lenders who will work with you charge origination fees.
Another consideration is the repayment term of the loan, as the fees are prepaid. The sooner you plan to pay off your personal loan, the less sense it makes to pay a set-up fee.
Visit Credible to use their personal loan calculator to find the best personal loan rates for you.
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What are the alternatives to personal loans?
Are you not sure whether a personal loan is right for you? There are alternatives to consider.
Credit card. Revolving line of credit, credit cards often come with low introductory rates for anyone with a good credit history. You can also earn points or rewards. Buy a credit card? Visit Credible to find the right credit card for all of your needs.
Personal line of credit. A personal line of credit is like a credit card that you use and pay off as you go. Personal lines of credit can have higher credit limits than credit cards.
Home equity loan. If you have equity in your home, you can often borrow against the value you’ve accumulated.
401 (k) ready. A 401 (k) loan is a loan that you take out of your retirement account. The rates are generally comparable, but you could lose the money you saved for retirement if you don’t pay back the loan.
Peer-to-peer loan. This type of loan is financed by a single investor or by several investors. The rates and terms are set by the people financing your loan rather than by a financial institution.
No one wants to pay more than they need to. But if you want to take out a personal loan, the origination costs can be inevitable. Some lenders don’t charge a setup fee, while others do. One lender may charge a higher interest rate and no origination fees, while another charges an origination fee but a lower interest rate.
To get the most bang for your buck, it pays to shop at a marketplace like Credible, where you can compare multiple lenders and rates in one place.
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