The truth is that nobody likes the fine print. It is just a boring thing to do for any borrower. Overlooking the origination fee on your personal loan is similar to overlooking the leg day at the gym: you will feel well right now, but you will regret later. In simple words, the origination fee is the cost of borrowing money from a particular institution. Unlike the processing fee, it compensates the lender for setting up your account. You can call it a premium for getting fast access to the funds.
On average, most financial institutions require between one and eight percent of the loan amount as an origination fee. Though the percentage does not seem huge, it may become one in case you borrow, let us say, ten thousand dollars. Then you would pay five percent of the money as a fee in advance. In this case, you get nine thousand five hundred dollars. Nevertheless, your total debt, which includes the fee, equals ten thousand dollars plus the interest on the loan. It is a cunning way of raising your interest rate without saying anything.
First of all, it is necessary to understand how the fee is transferred to the lender. Some lenders will subtract the fee from the total amount of the loan. The other lenders will add this fee to the principal amount of the debt, which needs to be repaid in the course of paying off the loan. However, if you need the entire amount of the money for some particular projects, for instance, purchasing a used car, you will find yourself in trouble at once. You will have to apply for additional money in order to fill the gap. Ensure to get the APR (Annual Percentage Rate) of your loan. This rate includes the origination fee.
Comparison shopping is very important in the matter of origination fees. For example, do not limit yourself to the first loan option offered by your bank. There are such fintech lenders as SoFi or LightStream, which do not charge the fee for borrowers with a good credit history. On the contrary, there are the platforms such as LendingClub and Upstart, which charge the origination fee but offer a lower interest rate. You have to make calculations in your particular case. To compare the loan conditions, use an online loan calculator and define the total repayment amount. Sometimes, a loan with a three percent fee and a lower interest rate turns out to be cheaper than a loan without a fee and a higher interest rate.
If your credit score is above 700, you have the power in your hands. You can use it and negotiate. Try to persuade the lender to decrease or remove the fee. This action might seem awkward but it works more often than people think. After all, the lenders are interested in your business, especially when you seem to be a reliable customer. If the answer is negative, there are many other alternatives online for you. Do not get fixed on the first loan offered to you.
At last, the “no fee” policy of some lenders turns out to be tricky. Usually, they do not charge the origination fee but compensate it with a higher interest rate. Do not trust them. Remember that they want to earn money from you. Calculate the total cost of your loan throughout its lifetime. A loan with a lower monthly payment may turn out to be more expensive due to the high interest rates. Be selective when choosing a loan. Read the terms and conditions carefully.