What Are Origination Fees?
A loan origination fee is a one-off charge imposed by a lender to cover the cost of processing your loan.
These upfront costs are most commonly used for personal loans. The amount can range from 1% to 8% depending on credit score, repayment term, and loan amount.
Let’s break this down further.
The Process Of Personal Loan Origination
It’s easy to play down an upfront origination fee when viewed as a percentage. Four percent, for example, seems pretty reasonable, right?
However, it takes on a more serious note when monetized. It’s important to know exactly what you’re getting in return for the outlay.
An origination fee by definition is a cost a lender charges for completing the necessary paperwork and for putting together the unique parameters of each loan. It’s a process that has several different stages.
- Pre-qualification: This first step requires the borrower to provide basic information relating to their income. This’ll include proof of salary, bank statements, and tax returns
- Loan application and processing: The lender fills out the loan application, which is received by the credit department. Its details are then reviewed for accuracy and to ensure no legally obligated sections have been overlooked
- Underwriting process: At this juncture a number of factors are taken into account and assessed. These include credit score, risk scores, and often a company’s specially tailored scoring criteria. This process is often automated
- Credit decision: The file is either approved or denied pending final approval
- Quality control: The variables of each loan are checked against industry rules and regulations
- Loan funding: Documents are signed and the loan is put in motion
How Is The Fee Determined?
Most lenders deduct the fee from the loan proceeds. This means that if you’re seeking a specific amount then that figure must be raised in order for you to receive that amount. An example might be that you are looking to borrow $25,000 to meet a home refurbishment cost. If the lender origination fee is set at 5% then you’ll be making payments on the $26,250 balance, not the $25,000.
Determining how much the upfront charge costs will vary from lender to lender. It also depends on the type of loan. Common considerations will include:
- The length and amount of the loan
- The reasons for it
- The borrower’s financial status, factoring in credit score and credit history
- Whether a co-signer is involved
In some instances, a determined cost upfront doesn’t mean it’s set in stone. A typical loan origination fee is essentially a commission-based payment and because of this, it’s perfectly possible to negotiate its amount down. A lender may relent to this in order to secure your business, but keep in mind that this often results in a higher interest rate over the loan’s period. Such haggling doesn’t apply to federal student loans.
Upfront charges are usually set in advance to a borrower taking the loan. Such charges should never be an unwelcome surprise at the time of closing.
What To Consider When Taking Out A Loan With An Origination Fee
A typical lender origination fee is accounted for in the loan’s annual percentage rate (APR). This number is a true representation of the annual cost of your borrowing. It includes factoring in fees and interest rates.
Ultimately a loan’s APR is infinitely more important than how large or small the origination fee may be. That’s because the upfront charge is included.
Other considerations to be aware of:
- Be suspicious of notably low origination costs. While this may seem like a great deal at face value, it often means lenders will make up for it via a higher interest rate. In the long-term, this will add a considerable sum to your loan
- If it’s possible to pay off the origination cost upfront instead of building it into your interest then opt for this option. This is always advisable