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Two fees that sit at opposite ends of a loan’s life — one charged for starting it, one sometimes charged for ending it early. Both change the real cost more than borrowers expect.
We flagged both of these briefly in loan contract red flags and how to read a loan offer. Here’s a closer look at how each actually works.
Origination Fees: The Cost of Starting the Loan
An origination fee is a one-time charge for processing and funding the loan, typically expressed as a percentage of the loan amount — commonly in the 1–8% range depending on the lender and your credit profile.
The part that catches people off guard: this fee is usually deducted from the loan proceeds, not billed separately. Borrow $10,000 with a 5% origination fee, and you actually receive $9,500 — while still owing interest on the full $10,000. This is why comparing loans by APR (which factors in this fee) rather than just the interest rate matters so much.
Why Origination Fees Vary So Much
Lower credit and higher perceived risk often mean a higher origination fee, similar to how riskier borrowers get higher interest rates. Some lenders advertise “no origination fee” loans, which can be a genuinely better deal — or can mean the cost is built into a higher interest rate instead. Comparing total repayment cost, not just the fee structure, is the only reliable way to tell which is actually true.
Prepayment Penalties: The Cost of Finishing Early
A prepayment penalty charges you for paying off the loan faster than scheduled — either as a flat fee, a percentage of the remaining balance, or a set number of months’ worth of interest.
This exists because lenders earn money on the interest paid over time; paying early reduces that expected income, and the penalty offsets it. Not all loans have one — many personal loans explicitly don’t — but it’s always worth checking rather than assuming.
Why This Matters More Than It First Appears
If you expect to pay off a loan early — after a bonus, a tax refund, or simply ahead of schedule — a prepayment penalty can erase some or all of the benefit of doing so. Conversely, if a prepayment penalty exists but you have no intention of paying early, it may not affect your decision much at all.
How to Compare Offers With Both in Mind
Ask directly for the origination fee amount and whether a prepayment penalty applies, then calculate total cost under two scenarios: paying on the full original schedule, and paying off early if that’s realistic for your situation. The loan that looks cheapest by interest rate alone doesn’t always stay cheapest once both fees are factored in.
For the full checklist of what else to review before committing, revisit how to read a loan offer before you sign.
