When you take out a loan, you may have to pay back more than just the principal and interest. Some lenders also charge processing fees to cover the cost of processing the loan, which can add hundreds of dollars to your loan. What you pay depends on your credit rating and overall financial situation.
You can also opt for a loan with no fees, but that doesn’t mean you’ll save on your overall loan cost. So you should do your research, compare loans with and without processing fees, and use the numbers to determine which option is best for your financial situation.
What is an origination fee?
A loan origination fee is an up-front fee your lender charges to process a new loan application. Lenders use these fees to offset the costs of underwriting and screening new borrowers. In the case of mortgages, origination fees are sometimes called points. Many personal loan lenders do not charge processing fees, but if they do, these fees can range from 1% to 8% of the loan amount, depending on your credit rating and loan term.
How are loan fees determined?
The referral fee is a percentage of the original loan amount of the service that qualifies you for a personal loan. If you can’t avoid loan fees, you can usually pay them back in one of two ways: by adding the fees to your loan balance or deducting them from the funds you receive.
The amount you pay depends on the following factors:
- your credibility
- your wealth
- your debt
- your total income
Greg McBride, chief financial analyst at Bankrate, said deducting withholding fees from the loan amount may be the only way some people can afford a personal loan. “Many borrowers would prefer to earn from loan proceeds simply because they may be cash-strapped anyway,” he said.
Not all loans have fees, but don’t assume these are always cheaper options. When considering a free personal loan, pay close attention to the other fees of the loan. Lenders still need to make money, so they may try to get their money back with higher interest rates or prepayment penalties. In some cases, the total cost of a loan with a fee may still be lower.
Should you consider taking out a loan if there are fees?
For lenders that charge a fee, this fee is a required loan fee – although you can negotiate a lower rate. However, an origination fee isn’t always a deal breaker. For example, loan fees can mean lower overall interest rates, as lenders without loan fees can raise rates to make up the difference.
The loan fee is only a small part of your total borrowing cost. E.g:
- Your credit rating: Arguably the biggest factor that affects loan interest rates is your credit rating. People with good credit scores (670 and above) are more likely to receive lower interest rates than those with bad credit.
- Type of Loan: With an adjustable rate loan, your interest rate can change over time based on market rates. A fixed-rate loan is the opposite, meaning your payment amount never changes.
- Your location: Mortgage rates vary depending on where you live.
Therefore, you need to determine the total cost to determine if processing fees make the loan more expensive.
However, processing fees are usually deducted from your loan proceeds, which means you may not receive the full loan amount. Still, the benefits of taking a fee-based loan may far outweigh the fee itself.
How do you compare loans and fees?
Comparing loans to fees will help you save money over time and ensure you get the best deal.
1. Get multiple quotes
As with any loan, it’s important to shop around to make sure you’re getting a good rate. Check out the best personal loan rates and find a lender that can serve you what you need. Ask your loan provider if they charge a processing fee, and review the full terms of your loan to avoid hidden fees.
2. Watch APR
The APR (or APR) of your loan is based on the interest rate, but also takes into account other costs, including loan fees. Do not add processing fees to the APR when determining the total cost of repaying the loan. If you do, your estimated cost may be higher than what you actually pay.
For example, let’s say you’re comparing personal loans from two lenders. Both offer 5% interest and a five-year repayment period. However, the first loan offer has a 3% fee, while the second loan offer has a 5% fee. The interest rate on both loans will remain the same, but the APR for the first loan will be significantly lower than the APR for the second loan.
3. Consider the loan term
Generally speaking, the shorter the loan term, the lower the interest rate. However, shorter loans typically have higher monthly repayments. If you pay processing fees on top of high monthly payments, you may be more inclined to opt for a no-processing loan to keep costs down.
How to save on origination fees?
Loans often come with closing fees to help lenders make money, while also providing borrowers with incentives such as lower interest rates and other fees that may be included. One of the best ways to save on fees is to get an estimate from a lender that never includes it in the loan. Credit unions usually have a membership requirement to join, but they don’t usually offer loan origination fees either.
All loans have interest and fees associated with them, so it’s important to consider all costs when borrowing. Loan origination fees can add hundreds or even thousands of dollars to your loan if you’re not careful. However, that doesn’t mean you should automatically decline loans that charge this fee, as they may overall be cheaper than loan options offered by lenders that don’t charge a fee.
If you’re in the personal loan market, make sure you do your research and find a lender that can offer you the best rates. By reading the fine print and knowing the right questions to ask your lender, you can confidently choose a loan within your budget.