I Took Out a Higher Interest Rate Loan and I’m So Glad I did

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About a few months ago, my condo building had a leak that damaged several units including mine. The total damage came out to be over $11,000. Although I had homeowners insurance, the process to file a claim would’ve taken over two months. If you’ve ever experienced anything like this, I’m sure you understand the dire need to get contractors out to fix the damage ASAP.

This is when I looked into getting a personal loan to cover these expenses until the insurance company finalized the claim. I started my research on LendingTree and Credit Karma by looking at customer reviews, and started to apply for personal loans through their sites.

The good thing about these two sites is that you can check your rates without impacting your credit score. They’ll automatically find the best interest rate and terms for you by matching you with several lenders, but I soon realized one thing that most people overlook: getting the lowest interest rate is not necessarily the best option for you.

My Initial Findings: Origination Fees

I was pre-approved by most lenders, including: Prosper, LendingClub, and Upstart. Each offered a fair interest rate and monthly payment that I could afford. As I started to complete the application for LendingClub, it wasn’t until the very last page that caught my eyes.

The exact loan amount for $11,000 that I requested wasn’t the amount I’d be receiving. Their origination fee of 6% is taken right out of the loan. So let’s do some simple math:

$11,000 x 6% = $660. My final loan amount: is $11,000-$660 = $10,340.

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See the dilemma here? In order to get the full $11,000 that I needed for the home repair, I’ll have to take approximately $12,000. To make matters worse, I’ll have to pay interest on the $12,000 that I “borrow”, not the actual amount that I receive.

But here’s the Bigger Issue…

Since the insurance company is expecting to finish the claim in a few months, what happens if I want to payoff the loan? Although almost every single lender out there claims that they don’t charge a prepayment penalty, aren’t these origination fees basically the same thing?

According to the Examiner, “Experts argue that high loan origination fees act as prepayment penalties in disguise”.

I couldn’t agree more. If I paid back the loan within 4-6 months, my APR would skyrocket.  If you want to take a closer look at how loan origination fees impact your loan, you can view a chart that compares your loan with and without origination fees.

Your Loan Should Be Tailored Towards Your Needs

If you’re taking out a loan and expect to pay it back earlier, you might be better off taking out a higher interest rate loan. The origination fees may seem small at first, but you’ll end up paying more if you decide to pay it back faster.

If you’re thinking that you’ll need the entire length of the loan to pay it off, getting a lower interest rate loan will be more beneficial for you.

Origination fees can seem like a small fee especially if you’re in dire need of cash, but in reality, these fees can end up costing you a lot more in the short term. Always figure out a game plan to see when you can pay off your loan. This will help you make the best decision to make sure you’re getting the best deal.

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  • Choose the one debt that is charging you the most interest and focus all of your extra payments on paying that one off first. This strategy, sometimes referred to as the snowball method, will get you out of debt quickly, and you will feel encouraged as you see your progress.

    • STEPHANIE MOORE

      I keep reading opposing thoughts on this. I live on a small fixed income. I always try to pay more than the minimum, but I took on a new roommate saying I’d pay all the bills. Which ends up with me still only making the minimum payments. I am terrified.

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