A personal loan origination fee is a one-time fee charged by a lender in order to evaluate your application and disburse the funds to your account.
In this article, we’ll discuss how the origination fee on a loan works, how it's calculated and what it means for the overall cost of a personal loan. By the end, you should feel much more comfortable comparing different loan offers and making a responsible decision.
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 or not you qualify. The origination fee on a loan is what the lender will charge you in order to complete this procedure.
What does an origination fee consist of?
A personal loan origination fee is not a flat rate. Instead, it’s usually structured as a percentage of the total loan amount. A loan origination fee can be as high as 10%, but for major lenders, fees are typically in the range of 1%-8%.
This means that if you’re applying for a $20,000 personal loan you can expect to pay somewhere between $200 (which is $20,000 * .01) and $1600 (which is $20,000 * .08).
When do you pay a loan origination fee?
In many cases, the loan origination fee will be subtracted from the total value of the loan. If you take out a $20,000 loan and the fee is $1000, you’ll actually receive $19,000 but pay back the full $20,000 (plus interest) over the loan’s lifetime.
In this example, the difference between the total value of the loan ($20,000) and the amount you receive ($19,000) is equal to the loan origination fee.
How do you pay a loan origination fee?
If your personal loan and the personal loan origination fee are set up in the way described above, there won’t be a separate step where you pay the fee. The amount you receive will already have the fee subtracted, so you only need to worry about making payments on time.
Importantly, you should probably account for this fact when deciding on what size loan you need. If you’re applying for a $20,000 loan but you only get $19,000 because there’s a 5% loan origination fee, that means you might be left in a tough spot if you need the full $20,000.
Modifying your loan request to account for the loan origination fee is relatively straightforward. You just need to divide your original loan amount by 1 minus the fee’s percentage.
So, if you need $20,000 and there’s a 5% fee, divide $20,000 by 1-.05, which is .95. In this example, to secure a full $20,000 you actually need to ask for $20,000/.95, or $21,052 (you’ll probably want to round this up to $21,100).
What determines a personal loan origination fee?
When calculating an origination fee for a personal loan, lenders consider a variety of different factors. All of these are worth bearing in mind as you apply for and consider different loan packages.
Because personal loans are often unsecured loans, your history of accepting and repaying loans is extremely relevant to the lending. This means that the loan doesn’t require you to put up any collateral, so your lender relies entirely on your financial ability to pay back the loan.
Personal loan amount
The loan amount you need will impact what sort of personal loan origination fee you have. Personal loans generally don’t require collateral, so the bigger the loan, the bigger the risk being assumed by the lender and the bigger you can expect the loan origination fee to be.
Duration of loan
For much the same reason, duration is a crucial part of calculating the origination fee on a loan. The longer the lifespan of the loan, the riskier it becomes because there is more time for something to go wrong. Remember that greater origination fees accompany riskier loans.
After creditworthiness, one of the most important factors determining the loan origination fee is your income. If you think of your creditworthiness as being an assessment of how well you’ve paid back debts in the past, your monthly income is like a rough indication of your ability to pay the loan back in the future, so it’s an important metric for lenders in deciding whether to approve you for a personal loan.
How to Compare Personal Loans with Origination Fees
Taking out a personal loan can be a serious responsibility. Here are steps you can take to ensure that you have the best experience possible.
Get multiple quotes
Talk to several lenders, get quotes on their fees and see how each stacks up. Different lenders will weigh factors like creditworthiness or loan duration differently, which could mean big differences in how they calculate fees.
Check the APR
The annual percentage rate (APR) is the yearly cost of taking out a loan. Though it’s based on the loan’s interest rate, it can also account for other fees and costs, such as the loan’s origination fee. By and large, you’re going to want to try for a loan with the smallest APR because that means it’ll cost you the least in the long run.
Just as the lender will think about the length of the loan when calculating its fees, you should think about the length when comparing different loan packages. The longer the loan, the greater the amount of time you’ll spend paying it back. Depending on the interest rates, this could make a big difference.
Likewise, you must think about your ability to pay the loan back out of your monthly or yearly earnings. Defaulting on a loan can have serious consequences for your ability to obtain credit in the future, so be sure you can afford the loan’s monthly payments.
Is paying a loan origination fee worth it?
You may not like the idea of a loan containing an origination fee, but depending on your individual circumstances it could be well worth it. To decide whether a loan origination fee is worth it, remember that you should consider the value of the loan and the amount you’ll owe against your other possible alternatives.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
Assessing a Personal Loan Origination Fee
Whether you choose to take a loan with an origination fee or explore one of Citi’s no-fee alternatives, be sure to weigh all the factors going into your decision and make a choice that will work for you. With the right planning, you can be well on your way to finding a personal loan that fits your requirements and budget.
Frequently Asked Questions
Do all personal loans have a loan origination fee?
No. Though it’s common to include a personal loan origination fee, some lending companies do not. Citi has a range of loan options that don’t have an origination fee.
Can you negotiate a personal loan origination fee?
For some loans, like mortgages, it’s possible to negotiate the origination fee, but for personal loans, the fees are typically non-negotiable.
Why are personal loan origination fees so high?
A lot of factors go into calculating a loan origination fee. If the fee on your personal loan is unexpectedly high it could have to do with your credit score, personal income, the requested loan amount, or the duration of the loan. Adjusting these variables can help you arrive at a lower origination fee.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.