Loans can come in handy when money is tight, but they’re not without their fees. Several costs are typically involved with loans that go beyond the loan balance itself. One common fee that many borrowers may not factor into their budget is the loan origination fee.
Read on to find out what a loan origination fee is, how much lenders charge, and other potential fees that might come with your loan.
Key Points
- Loan origination fees are typically charged by lenders as part of the cost to borrow.
- Expect to pay anywhere from 0.5% to 8% of the total loan amount, though exact fees will vary by lender and risk factor.
- Oftentimes, loan origination fees are deducted from your total loan amount, though they may also be added to the total loan amount requested.
What Is A Loan Origination Fee?
Lenders typically charge a loan origination fee to cover the administrative costs of processing a new loan application. This fee is typically expressed as a percentage of the total loan amount. It’s important to consider this fee to understand the full cost of the loan.
How Much Do Lenders Charge For Loan Origination Fees?
Loan origination fees can vary widely, anywhere from 0.5% to 8% of the total loan cost, though the exact cost varies by lender and loan type. In general, the more money you’re requesting and the more of a risk your lender considers you, the higher the origination fee could end up being.
How Are Loan Origination Fees Determined?
To decide how much to charge in loan origination fees, lenders assess your perceived credit risk. If they think you’re a reliable borrower, they may charge a lower fee, while the opposite may also be true.
Factors that may impact your loan origination fees include the following:
- Credit Score: A strong credit score indicates responsible borrowing habits, which can reduce the lender’s risk and lead to reduced origination fees. A lower score, on the other hand, increases the lender’s risk and can mean higher costs.
- Income/Employment: A steady job and substantial income suggest you’re financially capable of handling loan repayments, which can mean lower fees.
- Debt-To-Income (DTI) Ratio: A DTI ratio compares your monthly bills to your monthly income. A lower ratio means you have more money available to cover loan payments, which can have a positive impact on origination fees.
How To Calculate Your Loan Origination Fees
As noted, loan origination fees apply to a certain percentage of the loan amount.
So, let’s say you’re applying for a personal loan of $10,000 and your lender charges a 1% origination fee. You would take your total loan balance and multiply it by the percentage of origination:
$10,000 (loan amount) x 0.01% (origination fee) = $100
In this example, your loan origination fee would be $100.
Tip: Using an online loan calculator can be a quick and easy way to accurately estimate your monthly payments and total loan cost.
| Note: When comparing loan costs, always look at the Annual Percentage Rate (APR) rather than just the Annual Interest Rate (AIR), since APR includes additional fees like loan origination charges. This gives you a more accurate picture of the total borrowing cost over time. Learn more: APR vs AIR: What’s The Difference? |
How Are Loan Origination Fees Paid For?
There are two ways you can usually pay for your loan origination fees:
- Deducted From The Loan: With certain lenders, the origination fee will be deducted from the total loan amount. For example, if you want $10,000, but your loan origination fee is 1%, you’d only get $9,900, but you would have to repay $10,000.
- Added To The Loan: If you need the full loan amount, lenders may add the fee to the overall cost of your loan. That way, your fee is spread along with your loan payments.
| Alert: Never Pay Upfront Legitimate lenders never ask for money before approving a loan or dispersing funds. Loan scammers often disappear after collecting upfront fees, leaving borrowers without funds and in deeper in financial trouble. If a “lender” demands upfront payment, look elsewhere. |
Why Do Lenders Charge Loan Origination Fees?
Administrative loan costs are set in place because lenders need to go through a particular process when you apply. Lending companies must task one or more workers with processing your loan application, an operation that can take some time and effort to complete and involves the following steps:
- Preparation and processing of loan documents
- Inspecting your income and financial profile
- Checking and verifying your credit report, score, history, and ratings
- Administering an appraisal for a mortgage or mortgage refinancing
- Administering a property inspection (also for mortgages or refinancing)
- Requesting mortgage documents and instructions from a secondary source (common with mortgage brokers)
They compensate for this time and effort by charging loan origination fees. Essentially, the more paperwork that needs to be filled out, the more expensive the loan is, and the more risk your lender is taking, the higher your origination fee will be.
Furthermore, different loan amounts come with different levels of risk and reward, leading to even more use of human and financial resources. As such, an “origination fee”, sometimes called a “disbursement” fee, will be applied to many loan types.
What Types Of Loans Come With Loan Origination Fees?
Origination fees are a standard part of the loan process for just about all loan types, including the following:
- Mortgages
- Personal loans
- Car loans
- Private student loans
- Business loans
Is There A Way to Reduce My Origination Fee?
The good news is that origination fees can sometimes be lowered when you present yourself as a less risky borrower. Remember, the less time and effort that a lender must spend considering you as a potential borrower, the more reasonable your loan origination fee will be.
However, not all lenders will be open to such compromises. If you’re applying for a standard loan, they may charge you a standard fee. Then again, if you bring something to the table when applying for a large loan, the circumstances may change.
Lenders may reduce your loan origination fee when you:
- Have a good credit score, a decent income, and a high net worth
- Apply for a loan amount that your income is proven to support
- Offer up collateral (house, car, etc.) as loan security
- Find a cosigner with good credit and finances to back your loan contract
Other Common Loan Fees To Consider
Besides loan origination fees, other common loan fees you may encounter are:
- Late Payment Penalty Fees: When you miss or make a late payment, the lender will generally charge you a fee, which will be indicated in your loan agreement.
- Early Repayment Penalty Fees: Similar to a late payment fee, when you try to pay off your loan earlier than the agreed-upon time, the lender may charge you an early repayment or prepayment penalty fee.
- NSF Fees: If a lender tries to deduct a loan payment from your bank account, but there aren’t sufficient funds to cover the payment, you can be charged an NSF fee. This fee may be charged by your lender and your bank. NSF fees can go as high as $45.
- Application Fees: In order for a lender to process your application, they may charge you this fee, which usually costs no more than $100.
Bottom Line
Before applying for a loan, be sure to inquire about all associated fees to get the full picture of what your loan will cost you. Once you have a detailed list of all those costs, you can factor them into your budget. Make sure you can comfortably afford all these fees, plus your upcoming loan payments, so that you can avoid any debt issues in the future.
