When you’re looking for a loan, you’re looking to borrow money. What you may not know is that some lenders charge a fee when you receive your loan. This is called an origination fee.
An origination fee is a fee charged by a lender that is typically taken out of the loan before you receive the borrowed funds. Origination fees are quoted as a percentage of the total loan and are generally between 1% and 6% on personal loans in the United States.
You may be surprised if you’ve never heard of an origination fee and you suddenly have one attached to your loan. If you dig deep enough, you can see how much they may affect the loan and how you could possibly avoid them.
When you are issued a loan, the lender you are borrowing from may charge an origination fee.
The fee is meant to cover certain costs associated with the processing of your loan, such as the cost of pulling the borrower’s credit and personal documents, and verifying their identity.
If you were to apply the concept of an origination fee to getting a slice of pizza, it’s like the server is literally taking a bite of your slice as a “fee” before you get to enjoy it.
The cost of an origination fee can vary depending on a few factors, including:
The fee is typically a percentage of the loan, so assuming that the origination fee percentage is the same, the more money you borrow, the more you owe in fees.
To illustrate how much an origination fee could cost you, here’s an example: If you are approved for a $10,000 loan and there is a 5% origination fee tacked onto it, $500 will be taken from your loan amount. You’ll be left with $9,500 in loan funds—and potentially a jaw on the floor.
If you have a higher credit score, your origination fee may be lower, since lenders typically assess creditworthiness to gauge the risk that a borrower will default on a loan.
Another thing to note: Not all lenders charge origination fees. Choosing these lenders could be a good option if you’re someone who doesn’t like fees.
With a personal loan, the origination fee will typically be subtracted from your loan amount before the funds are disbursed.
Yes, you read that correctly. Lenders take the money out of your loan, so the amount of funds you actually receive is less than the total value of the loan.
Normally, by looking at the terms of your loan, you’ll be able to see if a given lender charges origination fees.
If you do decide to go with a lender who charges origination fees, those fee rates will vary from lender to lender, so be sure to read the loan terms.
Origination fees leave you with less money than what you have been approved for, which is never good. The goal is to choose a personal loan that will cost you the least in interest and fees.