The real APR on this $5,000 loan at 22% with a 10% origination fee over 2 years is 33.33%. The fee adds 11.33% to the rate because you receive $4,500 but repay payments set on the full $5,000.
The math
Inputs
| Loan amount | $5,000 |
|---|---|
| Interest rate | 22% |
| Term | 24 months (2 years) |
| Origination fee | 10% |
The formula in words
The monthly payment is set on the full $5,000, but the fee comes out first, so you only get $4,500. The real APR is the yearly rate at which your 24 payments are worth exactly the cash you received: solve present value of payments = cash received for the monthly rate, then × 12.
Step by step
| Step | Calculation | Result |
|---|---|---|
| Fee | $5,000 × 10% | $500 |
| Cash received | $5,000 − $500 | $4,500 |
| Monthly payment | $5,000 at 22% for 24 months | $259.39 |
| Total of payments | $259.39 × 24 | $6,225 |
| Real APR | rate at which 24 payments of $259.39 are worth $4,500 today | 33.33% |
Result
- Origination fee: $500
- Cash you actually receive: $4,500
- Monthly payment: $259.39
- Total of payments: $6,225
- Total interest: $1,225
- Total cost of borrowing (interest + fee): $1,725
- Real APR including the fee: 33.33%
- APR added by the fee: 11.33%
Assumptions
- The fee is deducted from the loan proceeds, as most personal-loan lenders do.
- APR found by the actuarial method used for Truth in Lending disclosures; a lender's disclosed APR may differ slightly because of payment dates.
- These are estimates that show how the math works, not financial, tax or legal advice. Lenders, card issuers and the IRS can calculate slightly differently.
Get help with this
Want help comparing your loan options? Leave your details and a specialist will reach out. It's free and there's no obligation.
What happens next: your details go straight to the FinancialPath team — no credit check and nothing to pay. Someone reads what you sent and gets back to you by email, phone or text. Tell us to stop and we stop.
What the 33.33% Real APR Actually Means
The 33.33% is the yearly cost of the money you actually get to use, not the rate printed on the loan. You borrow $5,000 at 22%, but the 10% origination fee of $500 comes out first, so $4,500 lands in your hands. Your monthly payment of $259.39 is still set on the full $5,000.
That gap is the whole story. You pay interest on $5,000 while only having $4,500 to spend, and the fee is charged up front. When those 24 payments are measured against the $4,500 you received, the yearly rate works out to 33.33%. The fee alone adds 11.33% on top of the 22% rate.
For a stressed borrower, the practical meaning is simple: the loan costs more than the advertised rate suggests. Over the 2 years you pay $6,225 in total, of which $1,225 is interest and $500 is the fee. The total cost of borrowing is $1,725. That is the number to weigh against whatever you need the money for.
What Drives the Real APR Up
Three things in this example push the real APR from 22% to 33.33%.
- The fee is taken from the proceeds. You never hold the $500, so it cannot help you cover payments or anything else. It is a cost you pay before the loan starts.
- Payments are based on the full amount. The monthly payment of $259.39 reflects $5,000, not $4,500. You are servicing a larger balance than the cash you received.
- The term is short. Spread over 24 months, the $500 fee is a large share of each year's cost. A longer term would spread the fee, but the numbers here are fixed at 2 years.
The interest itself is not the problem. The $1,225 of total interest matches the 22% rate on $5,000 over 24 months. The extra cost comes entirely from the $500 fee being charged up front while you only receive $4,500.
This is why comparing loans by interest rate alone can mislead. Two loans can both say 22%, but if one charges a 10% origination fee and the other charges none, the real APR tells you which costs more. Here, the fee is the difference between a 22% loan and a 33.33% loan.
How You Could Change the Outcome
Using only the numbers in this example, there are a few levers.
Reduce or remove the fee
The 10% origination fee is what adds 11.33% to the rate. If the fee were lower, the gap between the 22% rate and the real APR would shrink. Ask the lender whether the fee can be reduced or waived, and get any change in writing before you sign.
Borrow less or repay faster
The fee is a fixed $500 here. On a smaller loan, that same fee would be a larger share of the cash you receive, so the real APR would be higher, not lower. Paying the loan off faster is not reflected in these results, so confirm with your lender how early repayment affects the total cost before counting on it.
Compare the real APR, not the rate
Ask each lender for the APR that includes fees, and compare that figure. A loan with a lower stated rate but a large up-front fee can cost more than one with a higher rate and no fee. The 33.33% here is the number to beat.
Practical Next Steps
Before you accept this loan, do a few concrete things.
- Confirm the cash you receive. Ask the lender to state, in writing, the amount that will actually be deposited after the $500 fee. It should be $4,500.
- Confirm the monthly payment and term. The payment here is $259.39 for 24 months, totaling $6,225. Check that these match your offer documents.
- Ask for the disclosed APR. Lenders must give an APR for Truth in Lending disclosures. Compare it with the 33.33% shown here. A small difference can come from payment dates, as the assumptions note.
- Check your budget against $259.39. That payment is fixed for 2 years. Make sure it fits before you commit, since missing payments can cost more.
- Get competing offers. Even one alternative quote with the real APR shown lets you see whether 33.33% is the best available to you.
These figures are estimates that show how the math works, not financial, tax or legal advice. Lenders can calculate slightly differently, so confirm the final numbers with your lender before signing.
Frequently asked questions
Why is the real APR higher than the 22% interest rate?
Because of the 10% origination fee. The $500 fee is deducted up front, so you receive $4,500 but make payments set on the full $5,000. Measured against the cash you actually get, the yearly cost rises from 22% to 33.33%.
How much does the origination fee add to the cost?
The fee adds 11.33% to the rate, taking the real APR from 22% to 33.33%. In dollars, the fee is $500, and the total cost of borrowing including interest is $1,725 over the 2 years.
What will my monthly payment be?
The monthly payment is $259.39 for 24 months. That is based on the full $5,000 loan amount, not the $4,500 you actually receive after the fee. Total payments over the term come to $6,225.
Is a 10% origination fee normal?
This example does not say what is typical. What matters is the effect: a 10% fee taken from the proceeds raises the real APR to 33.33% here. Compare the disclosed APR across offers rather than judging the fee on its own, and confirm terms with each lender.
Does paying off early lower the real APR?
These results do not model early repayment, so the 33.33% assumes the full 24 monthly payments of $259.39. Ask your lender how early payoff is handled and whether any fee is refunded before you count on a lower cost.