- An origination fee is an upfront charge that lenders take to cover the cost of processing your loan application and disbursement.
- Not all personal lenders charge an origination fee, and others may have a range of fees based on creditworthiness and other factors.
- Try to avoid origination fees, but if you can't escape them, shop around to limit your costs.
An origination fee is a type of fee that lenders charge borrowers to cover the cost of processing the loan application and disbursing the loan funds.
Origination fees are most common among mortgage lenders, but you may also come across them with personal loans, as well as federal student loans, where they're simply called loan fees.[1-3]
"Origination fees are avoidable most of the time, so don’t think of them as a necessary cost like a down payment on a house or car," says Matt Lattman, vice president of personal loans at Discover. But depending on your credit history and financial situation, your no-fee options may be limited or nonexistent.
Note that in some cases, lenders may call this fee an administrative fee rather than an origination fee, but the effect is the same.
How do origination fees work?
Origination fees are usually calculated as a percentage of the principal balance of the loan rather than a flat dollar amount, but some states may require the lender to charge a flat amount.
The fee is typically deducted from your loan disbursement. Among lenders that charge one, the average loan origination fee is about 4%, based on Sound Dollar's September 2022 research. Depending on the lender, though, the fee can range from 1% to 10% of the loan amount.
If you're wondering what your specific origination fee would be, it depends on the lender, your credit history and income, and other factors the lender may or may not disclose.
Even with a low interest rate, origination fees can increase the APR. "A loan with a low rate but high fees can wind up being more expensive than one with a higher rate but no or low fees," says Lattman. "If two loans have the same APR, the cost of those loans is the same assuming regular monthly payments."
Remember, though, that not all lenders charge an origination fee. Still, you may need good or excellent credit to get approved with one of these lenders. Some of the top personal loan companies without an origination fee on personal loans include:[5-15]
Marcus by Goldman Sachs
PenFed Credit Union
Before you apply for a personal loan, shop around and compare multiple options to find the best deal for you. Below are some of the top lenders, according to Sound Dollar's analysis. The majority of reputable banks, credit unions and online personal loan companies allow you to prequalify—that is, check rates and confirm eligibility without affecting your credit.
Example of a personal loan origination fee
Personal loan origination fees vary based on a number of factors, but let's say that you're borrowing $10,000, and your lender charges a 5% origination fee.
In this case, you'll only receive $9,500 instead of the original $10,000 you requested. That may not be an issue if the reduced amount is enough to meet your needs. But if you need exactly $10,000, you'll need to do a little math to determine how much you need to request to get the amount you need.
More specifically, you'll need to borrow enough money so that the disbursement after the origination fee is $10,000. To do this, you'll divide $10,000 by 0.95, which gives you approximately $10,526. If the origination fee is 3% or 7%, you'll divide the required amount by 0.97 or 0.93, respectively.