Taking out a personal loan will cost you more than just repaying what you borrowed. You’re also on the hook for interest and fees—including origination fees, which generally cover the costs of processing a loan. These fees vary by lender and fluctuate based on the borrower’s credit history but are typically between 1% and 8% of the total loan amount.

Before you take out a loan, make sure you know what fees you’re responsible for, especially personal loan origination fees. Here’s what origination fees cover and how to look out for them.

What Is a Personal Loan Origination Fee?

Personal loan origination fees—also known as processing, administrative or underwriting fees—are charged by lenders when you take out a loan. They cover everything from processing an application and verifying the applicant’s income to covering marketing costs for the lender’s loan operations. Sometimes it’s a flat fee and other times it’s a percentage of your loan amount—anywhere between 1% and 6%, and sometimes as high as 8%.

Origination fees may be due in cash at closing or may be financed as part of your loan balance. To better understand the cost of a loan, it may be valuable to compare loan APRs—or annual percentage rates—rather than just interest rates. A loan’s APR will give you a better idea of the overall cost of your loan, including the interest rate and finance charges.

How Origination Fees Are Determined

There are a few factors that determine your origination fee:

  • Credit score. Your credit score can, in part, determine your origination fee. If you don’t have a good credit score for a personal loan, lenders may charge a higher origination fee. For example, if you have a credit score of 800—which is considered excellent—your lender may only charge an origination fee of 1% of your total loan amount; someone with a fair credit score of 650 might be charged 5% for the same loan.
  • Loan amount. Your loan amount also impacts your origination fee. As your loan size increases, you’ll often pay a larger origination fee. Your income and other financial obligations, like car loan and mortgage payments, could impact your origination fee as well. Because they depend on a combination of many factors, origination fees vary by lender, although some charge a flat rate.

If your lender subtracts fees from your loan proceeds, consider borrowing more than you need to cover the origination fee. For instance, if you borrow $5,000 and have a 5% origination fee, you’ll receive $4,750. Even though $250 goes straight to your lender, it’s still included in your loan balance and will need to be repaid. If you need the full $5,000, you might have to borrow more to cover the costs. Just remember you’ll need to know this upfront so you can include it in your initial loan request.

Are Origination Fees Worth The Cost?

Not every lender charges origination fees. If you don’t have great credit and don’t qualify for a personal loan with a lender that doesn’t charge origination fees, you may need to settle for a lender who does. It depends on your needs and credit history.

Origination fees are worth the cost when:

  • The combined interest and origination costs are lower at one lender than the interest rate at a lender that doesn’t charge origination fees
  • You need a loan, and lenders with origination fees are the only ones approving your loan application

If you have great credit and qualify for a personal loan with a lender that doesn’t charge origination fees, then these fees aren’t worth the cost.

How To Compare Personal Loans

If you’re considering taking out a personal loan, the best thing you can do early on is compare loans. Look out for:

  • Minimum and maximum amounts. Some lenders cap their maximum loan amounts, making it challenging to borrow what you need, while others have high minimum loan amounts that prevent you from taking out smaller personal loans.
  • Interest rates. Shorter loan terms and a low credit score will result in higher monthly payments, while the best personal loans offer longer terms and lower monthly payments to those with higher credit scores. 
  • Fees. Look out for other loan costs besides origination fees, including application fees, late fees and insufficient funds fees.
  • Flexible repayment schedule. Some lenders also let you choose monthly due dates and repayment terms that fit your needs, which can help you align your budget with your payment schedule—and personal loan pre-qualification lets you see your new schedule before complete the paperwork.
  • Turnaround time. Some lenders can process your application and give you the money all in the same afternoon, while others may not distribute money to your account for a week.

When shopping for a lender that meets your needs, consider reaching out to different types of lenders, including your bank and online personal loan lenders. If you’re running into approval issues, contact a credit union. They’re friendly to people who may not qualify for personal loans from online lenders or traditional banks.

Alternatives to Personal Loans

Not everyone qualifies for a personal loan or an interest rate they can afford. If you don’t have a credit score to secure the lowest available interest rate—while avoiding as many fees as possible—you may want to try other borrowing options. Consider these alternatives to personal loans:

Credit Cards

If you need to cover an expense right away and don’t have the time to research, apply and wait for a personal loan, try your credit card. Keep in mind that credit card interest rates tend to be higher than personal loan interest rates and may be variable, meaning they fluctuate over time. You may also face extra charges if you don’t make at least the minimum payment on your credit card.

Cash Advance from Credit Card

A cash advance usually come with their own fees and APRs, which are usually higher than your regular credit card transaction APR and much higher than interest rates on personal loans.

What’s more, interest starts accruing on credit card cash advances right away, which means you’ll owe more compared to loans that have a grace period or installment payments. This combination of factors makes cash advances an expensive alternative to personal loans so we rarely—if ever—recommend this option.

Home Equity Loan or Home Equity Line of Credit (HELOC)

Sometimes referred to as a second mortgage, a home equity loan is a lump-sum loan repaid in installments at a fixed interest rate. Your home is used as collateral and you can borrow based on how much equity you have in your home. You can also take out a home equity line of credit (HELOC), which is a revolving line of credit that you can tap into when you need it.