What Is A Loan Origination Fee?

What Is A Loan Origination Fee?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated August 17, 2022

While a loan is a versatile tool that can help you out in many different financial situations, it’s important to know that they aren’t free. In fact, when it comes to most loan types, there will be a number of costs associated with the process which range beyond the loan balance itself. The additional loan costs you end up paying will depend on a number of things.

One common fee that many borrowers may not factor into their budget, or may not even be aware of is the loan origination fee.

Need a guide to budgeting? Take a look at ours.

What Is A Loan Origination Fee?  

As we said, when it comes to almost any loan product, whether it’s a relatively inexpensive short-term loan or are a more expensive one, like a mortgage, you’ll generally see a few additional fees listed within your contract.   

For instance, an interest rate is an extra fee that your lender will charge you for the cost of borrowing. You may also be aware that defaulting on your loan comes with a certain penalty fee when you miss your payment date, whatever the reason may be. However, what you might not know is that there can also be several administrative fees tacked onto your final loan cost, and that’s where the loan origination can come into play.

Click here to see how lenders arrive at interest rates.

How Much Do Lenders Charge For Loan Origination Fees?

Assuming your lender does charge one, a standard origination fee is equal to 0.5 – 8% of your total loan amount. 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 To Calculate Your Loan Origination Fees?

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 x 0.01% = $100).

How Are Loan Origination Fees Paid For?

There are two ways you can usually pay for your loan origination fees, the first option being the more common one: 

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.

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. Whether the lending company is a small organization with a few employees or a major institution with a sizeable team, one thing is sure, they must task one or more workers with processing your loan application, an operation that can definitely take some time and effort to complete.

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 different loan types.

When Do Lenders Charge Loan Origination Fees?

Origination fees are often applied when the lender has to go through steps such as:

  • 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)

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. While not all lenders charge origination fees, particularly when you’re applying for smaller loans, those that supply larger loans often do, simply because they’re taking on added risk by letting you borrow more significant amounts from them.

Does financing a loan hurt your credit score? Find out here.

Types Of Loans Lenders Charge Loan Origination Fees

Origination fees are a more standard part of the loan process when it comes to:

Mortgages

Mortgage closing costs are where you will often see a lender or mortgage broker tack on an additional charge for origination. In fact, they are even more commonly seen with mortgage brokers. This is because your broker usually needs to contact several third-party lenders in order to find you the appropriate mortgage, as well as the best interest rates available. When it comes to mortgages, so much time and paperwork go into the process that your lender or broker generally has to charge for origination.

Look here if you’re not sure whether to apply with a bank or a broker.

Large Installment-Based Loans

A similar effect can be seen when you apply for a traditional installment-based product, such as a personal loan. If you were to apply for a relatively small amount, like a few hundred dollars, your lender may waive the origination fee because the level of risk involved is also small. Then again, if you were to apply for thousands of dollars, they would once again need to put in a lot more effort on the administrative side of things. In the end, if you want a large loan amount, you’ll have to pay up for it.

Trying to get the best personal loan for your financial situation? Check this out.  

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. 

Loan Origination Fee FAQs

Can I have the loan origination fee waived?

In most cases, you won’t be able to waive the loan origination fees, however, you may be able to negotiate it to a lower amount, the same way you would the interest rate. If you’re a long time customer of the lending institution, you also may have more room to negotiate. 

How much loan origination fees do lenders charge? 

Lenders typically charge between 0.5% to 8% of your total loan amount. That means, if you have $1,000 loan, you may be charged between $5 and $80. 

Are loan origination fees paid upfront? 

Loan origination fees are deducted from your loan amount. For example, if you want a $1,000 loan and the loan origination fee is $100, then you’ll only receive $900 in cash, but you’ll have to repay $1,000 plus interest.

Bottom Line

So, before you apply for any loan, be sure to ask your lender what they will charge you for loan origination, as well as closing, and other administrative costs. 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 near future.


Rating of 4/5 based on 6 votes.

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

You Could Win Up To $5,000

You Could Win Up To $5,000
Expires Soon

Borrow up to $50,000 from Fairstone and be automatically entered to win up to $5,000!*

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.

View Offer
Build Credit With Refresh

Build Credit With Refresh
Popular

Build credit while spending money with the Refresh Financial VISA card.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month
Popular

With KOHO’s prepaid card you can build a better credit score for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.