What Is an Origination Fee?
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Whether it’s a personal loan, mortgage or student loan, borrowing money usually comes at a cost. Besides paying interest, you might be on the hook for an origination fee. This type of fee can also be known as an application fee or point, and it is charged to cover a variety of processing costs.
Origination fees vary by lender, but understanding how they work can help you save time and money when you’re comparing loan offers.
What is an origination fee?
It’s common to find origination fees on mortgages, personal loans, student loans and auto loans. The fee is basically a service charge you pay the lender to process the loan application, prepare the necessary documents, execute the loan and help cover other administrative expenses. Mortgage origination fees — sometimes referred to as points — may also go toward covering a lender’s underwriting and funding costs.
An origination fee is typically calculated as a percentage of the total loan amount or as a flat fee. However, this can vary depending on the lender, type of loan, the size and length of the loan, and whether you have a cosigner. Your credit comes into play, too. If you have a less-than-solid credit history you might be charged a higher origination fee, say 8% for a personal loan versus a much lower rate.
Here’s a look at the average origination fee you can expect for different loan types:
|Typical origination fees|
|Loan type||Average loan origination fee|
|Auto loan||0% to 2%|
|Mortgage||0.5% to 1%|
|Personal loan||1% to 8%|
|Federal student loan||1.059% to 4.236% for loans disbursed from Oct. 2, 2019 to Sept. 30, 2020|
How your origination fee is paid
There are three ways to an origination fee is paid:
- The origination fee is added to the principal balance and paid back over time. This is common with personal loans, and it lets you receive the full loan amount without having to come up with funds to pay the fee upfront. The downside is that you’ll pay interest on that origination fee over the life of the loan.
- It is deducted from your loan amount. This is common with student loans. The downside is that you’ll receive a smaller loan amount — and still be responsible for paying back the full amount over time. This option might not be ideal if you’re cash-strapped, although it might actually make the loan more affordable over the course of the loan.
- You pay the origination fee upfront. Some lenders may let you pay your loan origination fee out-of-pocket. With mortgages, for example, lender fees are usually wrapped into the borrower’s final closing costs and paid at the time of closing.
How the origination fee affects loan costs
Origination fees can affect the overall cost of your loan. For example, some private student loan lenders might not charge you an origination fee but tack on a higher interest rate instead. This might leave you paying substantially more over the life of the loan.
The way you pay your origination fee can also affect the total cost of your loan. As you’ll see in the table below, a five-year, $10,000 loan with a 3% origination fee deducted from the loan amount would cost $663 less than a loan where the fee is added to the loan amount. Depending on the interest rate, it might also cost less than a no-fee loan — and provide only a slightly smaller loan sum.
|Origination fees for a 5-year, $10,000 personal loan|
|Origination Fee||Interest Rate||Total Cost of Loan|
|3% fee deducted from loan amount (leaving the borrower $9,700 in available funds)||3.99%||$10,716|
|3% fee added to loan amount||3.99%||$11,379|
Can you negotiate an origination fee?
You may be able to negotiate an origination fee, especially if you have a strong credit history. Again, every loan and lender is different, as you’ll see below:
|Negotiating an origination fee|
|Loan type||Can you negotiate?|
|Mortgage||Yes, if you have excellent credit|
|Personal loan||Some lenders will waive or lower the fee in exchange for a higher interest rate|
|Federal student loan||No|
To help you find an affordable loan and negotiate over the origination fee, consider the following tips:
Shop around and compare loan offers: To find the best loan for you, compare lenders by their rates, terms and fees. Many lenders will allow you to see loan offers with a soft credit check, which won’t affect your credit. Using these offers, you can use a payment calculator to estimate your potential costs. Having offers from other lenders will also help you negotiate over origination fees.
Lean on your credit: If you have strong credit, it might be your most effective bargaining chip for a loan as a lender will probably see you as a less risky borrower. Check to see if the lender will reduce the origination fee based on your strong credit.
Accept a trade-off: If the numbers line up with your budget, opting for a higher interest rate might help you lower or eliminate the origination fee.
How to avoid an origination fee
It isn’t always possible to avoid a loan origination fee, but depending on the loan type, some lenders may allow you to borrow without one. For personal loans, for example, look for reputable no-fee lenders that offer competitive APRs without charging origination fees. You’ll need great or better credit to qualify, but a no-fee loan might also come with zero fees for late payments, prepayment and insufficient funds.
You might also hold off on applying for a loan until you can improve your credit. With stronger credit, you’ll be in a better position to ask a lender to drop the origination fee, and you’ll potentially nab a lower interest rate.