Short answer: an origination fee is a one-time charge, usually a percentage of the loan, that is often taken out of the money you receive. On a $5,000, 36-month loan at 15% interest, a 6% fee means you receive $4,700 but repay $6,239.76, which makes the effective APR about 19.4%, not 15%. Under federal Truth in Lending rules, loan fees like this count as part of the finance charge (Regulation Z), and the APR includes interest and certain fees (CFPB).
Origination fee calculator
Worked example: $5,000 over 36 months at 15% interest
Monthly payment formula: P x r / (1 - (1 + r)-n), with r = interest rate / 12 and n = number of months. The effective APR is the rate at which the payments equal the cash you actually receive.
| Case | Cash you receive | Amount borrowed | Monthly payment | Total cost | Effective APR |
|---|---|---|---|---|---|
| No fee | $5,000.00 | $5,000.00 | $173.33 | $1,239.76 | 15.00% |
| 6% fee taken from the loan | $4,700.00 | $5,000.00 | $173.33 | $1,539.76 | about 19.44% |
| 6% fee added to the loan | $5,000.00 | $5,300.00 | $183.73 | $1,614.14 | about 19.18% |
| Borrow more to net $5,000 after a 6% fee | $5,000.00 | $5,319.15 | $184.39 | $1,638.04 | about 19.44% |
Total cost = all payments minus the cash you receive. Two lessons: the fee raises the APR the most on short loans, because it is spread over fewer months; and if you need a set amount in hand, a fee taken from the loan means you must borrow more.
How to compare offers with different fees
- Compare APRs, not interest rates. The APR is designed to include loan fees, so a lower rate with a big fee can cost more (CFPB).
- Check whether the fee is taken from the loan or added to it, and how much cash you will actually receive.
- Ask whether the fee is refunded if you repay early (often it is not), and whether there is a prepayment penalty.
- Compare the total of all payments for the same term.
Participating lenders may be able to provide personal loans of up to $15,000, and up to $5,000 for installment loans. Not all lenders can provide these amounts, and approval is not guaranteed. Any lender that makes you an offer must show you the APR before you sign.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.