When you’re in need of cash and exploring ways to borrow some, you’re likely collecting information about the interest rates, term lengths, monthly payments, and fees from multiple lenders — perhaps brick-and-mortar and online — so that you can choose the best option for your financial needs. When comparing loan offerings, the fees will often include loan origination charges. But, what is a loan origination fee, exactly? What is the average loan origination fee? Are they required and, if they’re not, should you prioritize getting a loan without one?
This post will walk you through the purpose of these fees and what you should compare and contrast before making a borrowing decision.
While consumers look for the best loan deals they can get, lenders are looking for ways to make money. That’s just the name of the game, necessary to keep the lenders in good financial shape and able to lend money to consumers like you.
One of the ways they do this is by charging an origination fee to cover the costs involved in the loan-making process. More specifically, there are general business costs associated with reviewing applications, approving or rejecting them, processing the approved loans, preparing documents to be signed and so forth. In other words, this fee is to cover the lender’s overhead.
This type of fee can be charged on mortgage loans, vehicle loans, private student loans, and personal loans, just to name a few.
Whether or not to include loan origination charges as part of a lending decision is up to each individual financial institution. So, no, they are not required, but they do have to be disclosed to the borrower. There is, however, one clear exception: If you’re taking out a federal student loan, you can count on an origination fee being charged. But in other cases, you may be able to find a good loan option that doesn’t include one.
Remember, however, that lenders have to make money in order to offer their services. By not charging an origination fee, a lender may be:
- Charging a higher interest rate than they are with loans that include an origination fee.
- Calling the origination fee by another name:
- Administrative fee.
- Application fee.
- Commitment fee.
- Processing fee.
- Rate-lock fee.
- Underwriting fee.
It’s also possible that a lender would list more than one of these fees. For example, they may charge a processing fee to cover their costs in application taking and documentation gathering. An underwriting fee might cover the overhead costs of having someone review the application and make a decision about approval or denial.
The answer to this question is, “It depends.” Some lending institutions charge a flat fee while others calculate the fee based upon the amount being borrowed. With a mortgage, this percentage is typically 0.5% to 1%. Which is better? Again, it depends. On a smaller loan, a percentage-based fee would likely be better, while with a larger loan the flat fee might be a wiser choice. Here are a few quick comparisons.
1. $250 Flat Fee vs. 0.5% Percentage Fee
- On $20,000: the percentage fee would be $100 (which is better)
- On $50,000: the percentage fee would be $250 (the deal is the same)
- On $100,000: the percentage fee would be $500 (percentage fee is double the flat fee)
- On $200,000: the percentage fee would be $1,000 (percentage fee is four times the flat fee)
2. $250 Flat Fee vs. 1% Percentage Fee
- On $20,000: the percentage fee would be $200 (which is better)
- On $50,000: the percentage fee would be $500 (percentage fee is double the flat fee)
- On $100,000: the percentage fee would be $1,000 (percentage fee is four times the flat fee)
- On $200,000: the percentage fee would be $2,000 (percentage fee is eight times the flat fee)
3. $250 Flat Processing Fee and $250 Underwriting Fees vs. 0.5% Percentage Fee
- On $20,000: the percentage fee is $100 (which is better)
- On $50,000: the percentage fee is $250 (which is better)
- On $100,000: the percentage fee is $500 (deal is the same)
- On $200,000: the percentage fee is $1,000 (percentage fee is double the flat fee)
4. $250 Flat Processing Fee and $250 Underwriting Fees vs. 1% Percentage Fee
- On $20,000: the percentage fee is $200 (which is better)
- On $50,000: the percentage fee is $500 (deal is the same)
- On $100,000: the percentage fee is $1,000 (percentage fee is double the flat fee)
- On $200,000: the percentage fee is $2,000 (percentage fee is four times the flat fee)
The bottom line: Explore loan offerings that fit your unique borrowing needs and make your decision using that specific info.
A typical loan origination fee will vary based upon the type of loan (e.g., mortgage or personal loan). In general, the average loan origination fee for a mortgage might be up to 1% of the amount being borrowed. For a personal loan, the typical loan origination fee could be up to 6%, although it depends upon the lender. The borrower’s credit history can also play a key role in what percentage the lender offers.
People take out personal loans for numerous reasons, including to consolidate credit card debt. When seeking solutions to tackle this kind of debt, check to see what minimum and maximum borrowing limits each lender places on its personal loans. Do they fit your needs? Compare interest rates, fees (including but not limited to loan origination charges), the flexibility of the loan repayment schedule, and how soon you can receive funds from the personal loan. Is it soon enough?
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