What Is an Origination Fee?

How Origination Fees Work

An origination fee is money a lender may charge you to complete a loan transaction. Many types of loans, including personal loans, student loans, auto loans, mortgages, and home equity loans, come with origination fees.

You may have to pay an origination fee upfront when you close on your loan. Alternatively, the fee may be deducted from your loan proceeds or rolled into the total loan amount so you can repay it over time.

Not all origination fees are created equal. The type of loan you take out, your credit history, and the lender you choose may affect the amount of your origination fee.

For example, one lender may charge an 8% fee, while another lender might charge 3%. Once you get approved for a loan, the lender will deduct the origination fee from your total loan funds.

An Example of Origination Fees

Let’s say you take out a personal loan for $5,000 that requires you to pay a 3% origination fee. You’ll be on the hook for $150 (3% of $5,000). If the lender deducts the origination fee from your loan at the beginning, you’ll only receive a loan amount of $4,850. This is important because if you actually need $5,000 for whatever expense it is you’re using the loan for, you’ll need to take out more than $5,000 to account for the origination fee.

Do I Need To Pay Origination Fees?

While an origination fee is not a requirement for all loans, many lenders charge them to cover the costs of things like gathering documents, verifying the accuracy of the information provided, requesting information from employers, and ensuring your application meets certain criteria.

Average Cost of Origination Fees

Origination fees are typically a percentage of the total loan amount, and they vary significantly depending on the type of loan, the lender, your credit history, and other factors. If you take out a home loan, for example, your origination fee may range from 0.5% to 1% of the amount you borrow. A personal loan may require you to pay a higher origination fee of 1% to 10%, depending on your credit. While these percentages may not seem like a lot, they can add up depending on the size of your loan. For example, if you take out a loan for $5,000, a 1% origination fee is only $50. However, if you take out a loan for $50,000, the origination fee is $500.

Alternatives to Origination Fees

In addition to origination fees, you may have to pay other fees when you take out a loan. While these fees differ by loan type, you may encounter a few of the following when shopping for a loan:

• Appraisal fee: An appraisal fee, which is widely seen in home loans, pays for the cost of having a property appraised. It's intended to ensure the loan is large enough to cover the value of a home you intend to buy. The cost varies based on your home’s location, the appraiser’s experience, and the complexity of the process.
• Late fee: Depending on your lender and type of loan, if you don’t make your payments on time, you may have to pay a late fee.
• Prepayment fee: Lenders of various loan types may charge a prepayment fee if you pay off all or part of your loan early.

Before you sign on the dotted line and accept any loan, make sure you’re aware of all of its fees. The fees should be clearly outlined in your loan agreement, but if they’re not, or if you’re unclear about a certain fee, don’t hesitate to ask the lender.

Frequently Asked Questions (FAQs)