What is an origination fee? When does it apply?
Everything you need to know about origination fees and how they work.
When applying for any sort of loan, it’s important to be aware of all the possible fees that will affect the final amount you’ll be paying. A common fee that many consumers have to pay as part of a loan, is an origination fee.
According to Investopedia, “An origination fee is an upfront fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place. Origination fees are quoted as a percentage of the total loan…”
When do origination fees apply?
Origination fees don’t only apply to personal loans, mortgages, auto loans, and student loans. Here’s a general idea of how most of them work:
Lenders charge borrowers an origination fee for entering into a loan agreement process. Much like interest rates and monthly minimum payments, the origination fee will vary depending on the lender, the total amount borrowed and the borrower’s credit assessment.
When trying to find the right lender, Bankrate explains that “Along with comparing (interest) among lenders, you should compare the origination fee they plan to set for your loan. You may get quoted very different fees from one lender to the next.”
On top of application fees, insurance, broker fees and a multitude of other charges that make this transaction a complex one, you should normally expect to pay approximately 1% of the amount you are borrowing to purchase a house for the loan origination fee. This will cover lender documentation, notary and attorney fees. Click on this NerdWallet article to learn more about other fees to prepare for when taking out a mortgage.
Finance Zacks explains that auto loan origination fees can either be a percentage of the amount you’re borrowing, which is usually around 1% or 2% of the total, or a flat fee. Generally speaking, a purchased car will have an origination fee based on percentage, whereas a leased car loan will be associated with a flat fee.
Approximately 65% of students misunderstand the terms of their own student loans, making it harder for them to pick the right lender and to prepare for repayment? A good start for this is understanding all involved fees, such as origination fees, for instance.
This Magnify Money article encourages current students and future students to always crunch the numbers before making a final decision. It’s also important to keep in mind that a federal student loan will be different than going with a private lender, as they can be subsidized or unsubsidized, and they both carry different pros and cons.
How do I lower my origination fee?
For some types of loans, mostly mortgages, the most common way to reduce an origination fee is accepting a higher interest rate, as lenders need to make money somehow. Generally speaking, this option is usually a good idea if you’re planning on refinancing within a few years, but a good exercise is calculating the final amount you’ll be paying with a lower versus a higher origination fee.
The final word on origination fees
When taking out a loan of any kind, always be prepared to pay origination fees and other charges that will bring up the total cost you will be repaying. Understanding every step of the transaction will make it easy for you to develop a repayment strategy without encountering any unexpected surprises down the road.
LendingPoint is a personal loan provider specializing in NearPrime consumers. Typically, NearPrime consumers are people with credit scores in the 600s. If this is you, we’d love to talk to you about how we might be able to help you meet your financial goals. We offer loans from $2,000 to $25,000, all with fixed payments and simple interest.