Fee or No Fee? How to Figure Out Which Loan Option Saves You the Most

By Timothy Moore · March 28, 2024 · 7 minute read

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Fee or No Fee? How to Figure Out Which Loan Option Saves You the Most

Personal loans are useful tools because you can use them for just about anything. From covering emergency car repairs to paying for home renovations to consolidating high-interest credit card debt, personal loans can be a game-changer for your finances. But, as with any kind of loan, personal loans typically come with fees.

But are loan fees bad? Not always. In fact, you may be able to secure a lower interest rate on your personal loan by paying a fee upfront — which will save you money in the long run.

Here, you’ll learn about personal loan options and the impact each can make on your finances so you can decide what suits you best.

Personal Loan Origination Fees, Explained

Personal loan origination fees serve as startup costs for initiating a loan. These are one-time fees that lenders charge to cover costs such as applications and underwriting. These fees often range from 1% to 6% but may go as high as 10%.

Not every personal loan has an origination fee, however. Often, borrowers with an excellent credit score can qualify for personal loans without fees (or at least much lower fees).

Some lenders make origination fees optional. At first glance, this might seem like a no-brainer. You might think, “Why should I pay a loan fee if I don’t have to?” But often, lenders may offer you a lower interest rate if you pay an origination fee upfront. This can save you money in the long run.

•   A smart strategy: Look at the loan annual percentage rate (APR), which represents the true cost of the loan. The origination fee and interest rate are both bundled into this rate. This makes it easier to compare loans with and without origination fees to determine which is actually the better deal.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

Personal Loan Origination Fee Example

To see how an origination fee affects your loan, here’s an example — one loan with an origination fee and one without.

In this scenario, your personal loan terms are as follows:

•   Amount borrowed: $50,000

•   Interest rate: 10%

•   Loan term: 5 years

With an origination fee of 0%, you’d pay a total of $63,741.13 over the next 60 months, which is the term of the loan.

But what if there’s a 5% origination fee? You’ll still pay $63,741.13, but you’ll either pay $2,500 out of pocket upfront or have $2,500 deducted from the loan amount — borrowing only $47,500.

But remember, some lenders may offer you a lower interest rate in exchange for paying an origination fee. In this instance, in the scenario above, the lender may drop the interest rate from 10% to 7%. In that case, your total loan would look like:

•   Amount borrowed: $50,000

•   Interest rate: 7%

•   Loan term: 5 years

The total payments over 60 months would be $59,403.60, or $4,337.53 less by paying the $2,500 origination fee. So that equals a savings of $1,837.53 once you deduct the fee. In this way, you can see why the answer to “Are loan fees bad?” may be “Not necessarily.”

Recommended: Personal Loan Terminology

How Are Loan Fees Determined?

Lenders consider a number of factors when calculating origination fees for personal loans, including:

•   Credit score: Unsurprisingly, your credit score plays a big role in determining your origination fee. Lenders see borrowers with strong credit as less of a risk, so fees are generally lower.

•   Debt-to-income ratio: The amount of debt you have compared to the amount of money you make is your debt-to-income ratio (DTI). This helps lenders determine how capable you are of meeting your monthly loan repayment commitment. The higher your DTI, the larger risk you are perceived to be — and that may be reflected in your origination fees.

•   Cosigner: Even if your credit isn’t in great shape, you can still potentially lower your origination fee (and interest rate) by having a cosigner with stronger credit.

•   Loan details: The amount you’re borrowing and the length of the loan can also impact personal loan origination fees.

💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

How Are Loan Fees Paid?

If you choose a personal loan with an origination fee, you usually pay in one of two ways:

Taken Out of the Funds You Receive

In this scenario, you pay the whole amount of the origination fee at the start of the loan. Rather than dig in your pockets to come up with the cash, it’s usually subtracted from the amount you borrow.

For instance, if you borrow $20,000 and there’s a 5% origination fee, you’d owe $1,000. Lenders will typically instead give you $19,000, because they’ve taken the fee out of the funds they are lending you. However, you’ll have to pay back the full $20,000, plus interest.

Keep this in mind when taking out the loan. If you need the full $20,000, you should actually request a slightly larger loan so that, after the origination fee, you walk away with $20K.

Note: In some instances, a lender may require an out-of-pocket payment for the origination fee.

Rolled Into the Loan

Alternatively, lenders may simply roll the origination fee into the loan. In the example above, you’d receive $20,000 at the start of the loan, but with a 5% origination fee built into the loan, the personal loan principal (the amount you have to pay back) is $21,000.

Recommended: Where to Get a Personal Loan

How to Compare Loan Terms

No matter what you plan to use a personal loan for, it’s wise to comparison-shop carefully. Simply because one loan comes with an origination fee and another one doesn’t, that doesn’t mean you should go with the fee-free option. In fact, in the long run, a personal loan with an origination fee could be cheaper. Here’s how to find the best personal loan offer for you:

1. Shop Around

First and foremost, it’s a good idea to get quotes from multiple lenders. Most lenders allow you to get prequalified online, without impacting your credit score. Having a handful of offers allows you to weigh your options and make an informed decision.

2. Compare APRs

It can be tempting to see that one loan has a high origination fee, one has a moderate fee, and one has no fee at all — and simply choose the loan without the fee. However, origination fees are a part of a loan’s APR, which also includes the interest rate and gives you a better idea of the true cost of the loan.

To truly compare apples to apples, focusing on APR is your best bet.

3. Think about Loan Length

Shorter loan terms tend to have lower interest rates, but because you’re paying off the loan in a shorter amount of time, monthly payments will be higher. Conversely, you may find a lower monthly payment with an extended term, but then you’ll likely be paying more interest over the life of the loan.

It’s a good idea to play around with each loan you’re considering to see how various loan lengths will affect your monthly payments and the total amount you’ll spend over the life of the loan.

Other Types of Loan Fees

Origination fees may be the most common type of personal loan fee we consider, but there are other fees to review in the terms and conditions from a lender before signing on the dotted line. These fees may include:

•   Prepayment penalties: Some lenders charge you for paying off the loan early. Why? When you pay it off early, the lender makes less money from interest, so it’s in their best interest to keep the loan active as long as possible. Many lenders, however, do not charge prepayment penalties, so shop around.

•   Late fees: You have a monthly obligation to make your fixed payment on a personal loan. Just as with credit cards and student loans, you may be charged a late fee if you miss your payment date.

•   Monthly service fee: Some lenders charge a service or payment processing fee, depending on how you pay each month.

The Takeaway

While the thought of paying fees on top of interest when borrowing money can be overwhelming, personal loan origination fees aren’t always a bad thing. In fact, many lenders with origination fees can offer you lower interest rates, meaning you may spend less money in the long run by choosing a personal loan with an origination fee. Experts suggest comparing multiple loans and their APRs, which reflect the total cost of the loan, to get a better idea of the right loan for you. That can help you answer the question, “Should I pay a loan fee?” by focusing on the big-picture cost of your loan.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

Photo credit: iStock/milorad kravic

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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