What is an Origination Fee on a Personal Loan?

When taking up a personal loan, lenders often charge an upfront origination fee. This type of fee may also be known as the underwriting fee, processing fee, or administrative fee, and lenders use it to cover the cost of processing the loan application. You can save hundreds of dollars if you know what is an origination fee on a personal loan and how to avoid paying it.

Keep reading to know how to browse loan offers and negotiate with your lender to get the best loan deal.

How much is a personal loan origination fee?

Lenders charge origination fees based on the work they have to put into processing and disbursing your loan application. These initial services include scouting for loan proposals, gathering documents, checking creditworthiness, verifying documents, underwriting and funding services, and other administrative services for sanctioning loans.

Lenders follow different pricing models for origination fees based on minimum cost averaging of all their loan products. Origination fees can be zero, fixed, or charged as a percentage of the loan amount as processing fees. To avoid confusion on how to calculate loan origination fees, lenders usually charge a uniform percentage of the total loan amount as origination fees. Lenders set the origination fee to cover the administrative costs of processing the smallest loan size. Regulation Z in the Truth in Lending Act regulates these service charges and protects the interest of borrowers.

Your lender will charge you the origination fee upfront. You can find the origination fee on the HUD-1 Settlement Statement, Loan Estimate, or Closing Disclosure. You can pay it from your pocket or adjust it from the loan amount. Hence, you may add the origination fee to your required loan amount to cover the shortfall. For example, if you apply for a $10000 loan with a 5% origination fee, the $500 fee will be deducted from your loan amount, and you will receive $9500. Note that you need to pay interest on the entire $10000.

Let us understand how to calculate loan origination fee and how it affects the final APR of a personal loan.

Case 1 

Loan Amount $10000
Origination Fee 5%
Interest Rate 10%
Repayment term 4 years 
Origination Fees to be paid upfront 5% of $10000= $500
APR 12.74%
Monthly Payment $253.63

Case 2

Loan Amount $50000
Origination Fee 2%
Interest Rate 14%
Repayment term 4 years 
Origination Fees to be paid upfront 2% of $50000= $1000
APR 15.10%
Monthly Payment $66,583.32

Case 3

Loan Amount $50000
Origination Fee 2%
Interest Rate 14%
Repayment term 1 year