What is a Personal Loan Origination Fee?

When you take out a personal loan, you agree to pay back what you borrow, plus interest and fees. Depending on your loan, that may include an origination fee.

A personal loan origination fee is a one-time fee charged by a lender to process your application and disburse funds to your account. Not all lenders charge an origination fee. However, it’s still important to understand how these fees work if you’re looking to borrow.

Let’s discuss how the origination fee on a personal loan works, how it’s calculated and how it affects a personal loan’s overall cost.

How does a personal loan origination fee work?

Between gathering important documents and filling out the necessary paperwork, applying for a personal loan can be an involved process. This is also true for lenders, who must process your application, answer any questions that may arise and ultimately decide whether you qualify. The origination fee on a loan is what the lender may charge you to complete this procedure.

What does an origination fee consist of?

A personal loan origination fee is not typically a flat rate. Instead, it’s typically structured as a percentage of the total loan amount. The exact percentage will depend on the lender, but it can typically range from less than 1% up to 8% of the total loan amount.

When do you pay a loan origination fee?

In many cases, you won’t pay a loan origination fee up front. Instead, the loan origination fee will be subtracted from the total value of the loan and repaid over the term of the loan. For instance, if you take out a $20,000 loan and the fee is $1,000, you’ll actually receive $19,000. In that case, you’d still need to pay back the full $20,000 (plus interest) over the loan’s lifetime.

How do you pay a loan origination fee?

Typically, you won’t need to do anything to pay the origination fee since it’s built into the loan disbursement process. Because of this, it’s important to account for any origination fee when deciding on what size loan you need.

Luckily, the process is relatively straightforward. You just need to divide your original loan amount by 1 minus the fee’s percentage, represented as a decimal. For example, if you need $20,000 and there’s a 5% origination fee, you’d divide $20,000 by (1 - .05), or .95. That means you’d need to ask for $21,053 in order to receive the full $20,000 you need.

What determines a personal loan origination fee?

Lenders may consider your credit score, loan amount and term when calculating an origination fee.

Credit score

Personal loans are typically unsecured, which means they don’t require collateral. Instead, lenders consider your credit score when determining how likely you are to repay your loan. A higher credit score may help you access a lower origination fee.

Personal loan amount

Since origination fees are generally a percentage of the loan amount, bigger loans typically mean a higher origination fee.

Duration of loan

Duration is also crucial in calculating the origination fee on a loan. In general, longer loan terms may have lower origination fees. However, that may also mean paying more interest overall.

How to compare personal loans with origination fees

A personal loan is a serious responsibility. Here are some steps you can take to help ensure that you make the right choice for your needs.

Get multiple quotes

Talk to several lenders, using pre-qualification when available. Pre-qualification lets you see potential loan terms without harming your credit¹. Then you can consider the potential fees and see how each loan compares.

Consider the APR

The annual percentage rate (APR) is the yearly cost of taking out a loan. This includes the loan’s interest rate as well as other costs, such as the loan’s origination fee. In general, if you’re comparing loans with similar terms, a lower APR will cost you the least in the long run.

Payback timeframe

Just as the lender will think about the term of the loan when calculating its fees, you should think about the term when comparing different loans. The longer the loan, the more time you’ll spend paying it back. At the same time, that may also mean a lower origination fee.

Income

Your ability to repay the loan, based on your monthly or yearly earnings, is also key to finding a loan that works for you. Your payments can also impact your credit. For example, making on-time payments may help boost your credit score over time, while defaulting (failing to make payments for a certain amount of time) can have serious consequences for your credit score.

Is paying a loan origination fee worth it?

You may not like the idea of a loan origination fee, but depending on your individual circumstances, it could make sense. To decide whether a loan origination fee is worth it, remember to consider the value of the loan and the amount you’ll owe against other possible alternatives.

Frequently asked questions: personal loan origination fees

Do you get your origination fee back?

In general, the personal loan origination fee is non-refundable.

Can you negotiate a personal loan origination fee?

It may be possible to negotiate the origination fee, though this may mean changes to your other loan terms — for instance, a higher interest rate.

Why are personal loan origination fees so high?

Many factors go into calculating a loan origination fee. If the fee on your personal loan is unexpectedly high, it may have to do with your credit score, personal income, the requested loan amount or the duration of the loan. Adjusting these variables may help you arrive at a lower origination fee.

Do all personal loans charge origination fees?

There are personal loans that don’t charge origination fees, including no-fee personal loans. For example, Citi Personal Loans have no fees and offer term flexibility. If you think you could benefit from a Citi Personal Loan, you can apply online today.

This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.