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What is an origination fee on a personal loan?
Learn how lenders apply these fees, how much they cost and where to find a loan without one.
When comparing personal loans to find the most affordable one, it’s not enough to just compare the interest rates. You will also run into lenders that charge fees, with origination fees often being the most common. Depending on your lender, these fees will vary in costs and how they’re applied to your loan. Knowing what to expect beforehand can help you score a more competitive loan that will come at a cheaper cost.
An origination fee is a fee your lender charges to cover the cost of processing your application and the loan agreement. Typically, it’s a percentage of your loan amount — usually between 1% and 5% — however sometimes its charged as a dollar amount. The origination fee applies after you’ve been approved for the loan and signed your loan contract.
The amount you’ll be charged for your origination fee usually depends on a few factors including:
- Creditworthiness. Generally, you’ll need to have good or excellent credit, exceed your lender’s income requirements and have a low debt-to-income ratio to qualify for the lowest origination fee.
- Loan amount. Lenders sometimes charge lower origination fees on larger loan amounts.
- Loan term. The longer your loan term, the more you might end up paying for your origination fee.
Few lenders charge an origination fee upfront — most lenders just add it into your loan amount. There are two ways a lender might do this:
- Deduct it from your funds. This is the most common way lenders charge an origination fee. Here, your lender subtracts the origination fee from your funds before you receive them. You won’t get the same amount you were approved for, but you also won’t end up paying interest on a higher balance.
- Add it to your loan balance. Though less common, you might come across a lender that adds your origination fee to the loan principal. You’ll receive the same amount you were approved for, but you’ll end up paying interest on a larger loan amount — which can increase the overall cost of your loan.
Many borrowers don’t understand how origination fees work and are unpleasantly surprised that they didn’t receive the full amount they expected. To avoid this, make sure you know how your lender charges its origination fee and adjust your loan amount if necessary to account for this extra cost.
Let’s take a look at two examples.
Say you take out a loan of $10,000 with a 4% origination fee.
- If your lender adds it to your loan balance, you’ll have a loan principle of $10,400 — even though you’ll only receive $10,000. Pay that loan off at a 10% interest rate over five years and you’d pay a total of $2,858.16 in interest, not including the $400 origination fee. Overall, your loan will cost you $3,258.16.
- If your lender subtracts your origination fee from your funds, you’ll only receive $9,600 but pay off a loan balance of $10,000. Here, you’d pay a total of $2,638.30 in interest. That’s about a $620 difference.
These are the ranges of origination fees you can expect from some top personal loan lenders in Canada:
|Provider||Origination fee||Review page|
|Fairstone||None on unsecured loans||Learn more|
|Refresh Financial||$200-$400||Learn more|
Looking for a lender that doesn’t charge an origination fee? You’ll typically need good to excellent credit to qualify for these competitive personal loans.
Origination fees might have a sizeable impact on how much your loan costs — but that’s not the only cost you need to consider. The easiest way to compare the total cost of a loan is to compare the annual percentage rate (APR). This is an expression of the interest and fees you’ll pay over the course of one year — the APR is the true cost of the loan.
- Since APRs are by the year, make sure you’re comparing loans with similar terms. A lower APR on a seven-year loan could cost you more than a higher rate on a five-year loan.
Here is a breakdown of what’s typically included in the APR:
- Interest. Interest is a percentage of the loan amount that your lender charges periodically. The interest rate typically refers to the annual interest rate, or how much you would pay in interest over one year — however some short-term lenders charge monthly interest rates, which applies each month you take to pay back your loan.
- Other common fees.
- Application fees. Some lenders charge a fee for processing your application. Usually, application fees don’t exceed $100.
- Late fees. Many lenders charge a fee of around $15 or 5% of the payment due if it’s more than 10 or 15 days late.
- Nonsufficient funds (NSF) fees. If a cheque bounces or payment otherwise doesn’t go through, most lenders charge an NSF fee. This is typically around $25 to $50.
- Early repayment penalties. You might come across a lender that charges a penalty if you want to pay your loan off early. Also known as prepayment penalties, these are typically equivalent to what you would have paid in interest if you paid off the loan according to your term.
Your loan’s total cost isn’t the only thing you should consider when comparing lenders. Here are other factors you’ll need to consider:
- Eligibility. Before you apply for a loan, make sure you meet the eligibility requirements. Many lenders have minimum credit score, income and debt-to-income ratio requirements, as well as age, residency and employment requirements.
- Monthly payments. How much you owe each month might be even more important than the loan’s total cost since it’ll affect your monthly budget. Generally, the longer the loan term, the lower your monthly payments — but the more you’ll pay in interest overall. You can use our monthly payment calculator to figure out how much you’d owe on a loan based on the loan amount, APR and loan term.
- Loan amounts. A loan with no origination fee won’t do you much good if the lender doesn’t offer the amount that you need to borrow. Personal loans typically range from $1,000 to $35,000, but not every provider offers as little as $1,000 or as much as $35,000. Use our personal loan borrowing power calculator to find out how much you could afford to borrow.
- Turnaround time. If you need money fast, speed is going to be a top priority. Many online lenders offer next-day financing, though you might not find the most competitive rates for this kind of speed.
Understanding how origination fees work can save you from the nasty surprise of getting less money than you thought you would or an inflated fee. Keep in mind it’s possible to find a lender that doesn’t charge origination fees — or any fees at all. While this might sound too good to be true, it’s best to compare other factors including the APR and loan terms to get the best deal possible. Visit our guide on personal loans to learn more about your options.
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