Personal Loans » Advice » Loan Origination Fee: The Things You Should Know
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Loan Origination Fee: The Things You Should Know

Lenders apply a loan origination fee for compensation of the service they provide. Learn how you can reduce your fee and even eliminate it completely
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: September 20, 2023
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: November 1, 2023

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

In this Comparison

What is an Origination Fee?

Here is a simple definition: loan origination is the act of applying and the lender processing a home loan.

The loan officer addresses this at the start of your loan application process. They also sum up this process at the loan closing. On top of that, lenders apply a loan origination fee for compensation of the service they provide.

So you may be wondering what does this mean in dollar amount. This is contingent on the amount you need to borrow. The fee is typically between 0.75% and 1.5% of the loan amount. For instance, if your home loan is $300,000, you’ll pay a fee that’s between $2,250 and $4,500.

As you can probably already know, lenders discuss the loan origination fee at the beginning. The lender applies this fee to cover their effort to get you to apply, your application process, and gathering additional information about your financial journey.

This information determines whether or not the lender pre-qualifies you for a loan.

The Average Percentage Of Origination Fee in Mortgage & Personal Loans

This type of fee is contingent upon the loan amount and/or the value of your home.

Mortgage Loan Origination Fee

The lender computes this fee as a percent of the total mortgage. No matter how much work the lender puts in, mortgage loans that are high in value will have a higher loan origination fee than those of low value. In a nutshell, the fee is typically 1% of the total amount of the mortgage loan.

Personal Loan Origination Fee

If you apply for a simplistic loan that lenders typically approve, your fee may be low. Moreover, lenders are aware of the fact that people can go anywhere to get loan approval. As a result, a lender might not charge this type of fee. If they do charge, it will be lower than what they’d usually charge.

If the lender has to do a lot of work, the origination fee will be higher. A loan type that most lenders don’t typically approve is another reason they may charge a higher fee. A lender has many types of loans, know which type he will approve in comparison to the ones he won’t.

Loans that are risky pose less competition for lenders. Lenders are able to charge higher fees due to the amount of work they provide and the risk of default.

Another key point is the loan amount. The smaller the loan, the lower the origination fee will be.  Moreover, this allows the lender to make up for the low commission. If you borrow a low amount, the lender won’t have much of a profit. This is why they will charge a higher loan origination fee. You can see how much they’ll charge by looking at the loan estimate.

The government requires lenders to send this documentation within 3 business days of receiving your personal loan application. The following is what the document includes.

  • Potential interest rate
  • Monthly payment
  • Estimated closing costs (including the origination fee)

It’s Your Money – Do Your Math and Calculate

Some lenders may advertise that they don’t have prepayment penalties. What they don’t tell you is that the origination fee acts as one in disguise.

If you desire to get a personal loan with no fee, you’ll have to find a lender that doesn’t charger one such as SoFi or Citizens Bank. If you qualify for a loan where the lender doesn’t require a loan origination fee, you’ll save a lot of money, theoretically. Getting a no-fee loan doesn’t mean that the loan will be cheaper. The bottom line is that the lender has to make up for the fee somehow.

Depending on how fast you can pay off your loan, the actual cost of the loan will vary. The example below insinuates that you pay a 1.5% origination fee. It also illustrates a $10,000 loan for 24 months with a 1.5% origination fee. Here’s a visual for you.

Example of a loan origination fee calculation: 0.015 * 10,000 = $150

  • If you plan to pay back the loan within a span of 6 months with a 25% interest rate, it’d be better for you to get a loan that has an APR up to 29.87% without the origination fees.
  • In case you plan to pay back the loan within 12-month span with a 20% interest rate, it’d be better for you to get a loan that has an APR up to 22.65% without origination fees.
  • If you plan to pay back the loan within a span of 24 months with a 15% interest rate, it’d be better for you to get a loan that has an APR up to 16.3% without the origination fees.

In this chart compiled with LendingTree customer data, you can see that those with a 720+ credit score pay an average of 7.63%. At the other end of the scale, for those with a poor credit rating of less than 560, the rate shoots up to an eye-watering 113%.

 

How To Lower The Loan Origination Fee

This type of fee is not required. Some lenders charge them and others don’t.

The fee itself can be negotiable. Moreover, the more money you want to borrow, the more you can negotiate. If you pay more per month on your mortgage than the person next to you, that doesn’t mean that your application process is longer.

Take this for instance. There are two loans. One is $400,000 and the other is $100,000. Both individuals have the same credit score, debt ratio, and income. On top of that, they are low-risk loans. The lender they typically use charges a 1% origination fee. Regarding the $400,000 loan, it’s $4,000. IN regard to the $100,000, it’s $1,000.

There is a major difference between the two. If the application process has the same amount of workload, the lender may be willing to negotiate on the $400,000 loan amount than the $100,000 one.

If the lender decides to charge 0.5% on the $400,000 loan, they end up making a profit of $2,000. Moreover, this is still $1,000 more than what they would have made on the $100,000 loan.

If you decide to take a higher interest rate, lenders would be more prone to negotiate on the loan origination fee. One thing to note is that this fee does not lower your rate. The lender does profit from it though. If you want a lower origination fee, the lender will increase the interest rate to compensate for the low origination fee. As of result, the lender will make get their money over the lifespan of the loan.

Negotiation of Loan Origination Fee

The fee itself is not set in stone. You can negotiate the fee to a lower amount if you want to. Having good credit get your lower interest rate loans gives the lender more incentive to negotiate on the fee . In addition, you can request a flat-rate loan processing fee.

You can also avoid paying the loan origination fee if you request the seller of the house to pay for it. If the seller is in a hurry to move or doesn’t want to deal with the selling process no longer than he has to, he or might go ahead and pay the fee for you.

Decide What’s Important to You

Depending on your borrowing needs, the lowest cost option may not always be the best fit. You may be willing to pay the origination fee to get a lower monthly payment.

Moreover, you may not even have the best credit score, and the lender requires an origination fee for the loan you want. Lenders that have a lenient credit policy typically include this fee. Above all, if you consolidate debt and really need the loan, paying the origination could be unavoidable.

If you know what you want in a personal loan, you can consider the origination fee to decide which one is the best fit. In addition, it can add to the cost of your loan. You may even consider paying the fee if the loan is exactly what you need. The main way to discover this is to do your own research in regards to the loan and lender of choice.

Additional Personal Loan Fees to Know

Don't worry – most of the following fees aren't charged by most of the lenders. However, there are some optional fees, depends on your lender and your payment behavior:

  • Application Fee – A loan application fee is the first common fee that a borrower must pay to get a loan. The application fee will vary according to the type of loan you are applying for and it's something that you pay outright and upfront when you submit your loan application. Lenders will vary in the amount of loan application fees. Some lenders will not charge this fee at all.
  • Annual Fees – Lenders may impose a flat fee once a year on loan schedules. It can be anywhere from $100 to more. This covers the cost of maintaining your account with the lender during the term. There are many lenders that do not charge this fee. This means you can save money if you shop around for a lender. You can negotiate the amount if your lender charges an annual fee.
  • Processing Fee – As a processing fee, the lender may collect anywhere from 1% to 22% of the loan principal. This is your payment to the lender to do what they do best: process your application. If you are in a long-term relationship, they may agree to waive the fee.
  • Paper Copy Fee – Online lenders expect you to do all transactions electronically when you deal with them. The lender will charge a fee for providing a printed copy of the loan agreement to you. This fee is paid by some borrowers who are not comfortable using e-signatures in official documents.You will need to pay $10 for a paper backup of your loan documents.
  • Credit insurance fees – Most personal loan providers will ask for credit insurance. This is to protect the borrower in the event that he or she becomes suddenly unable to repay the loan. Insurers will assume the obligation if the debtor is unable to repay the loan.
  • Repay Your Loan – You may be charged additional fees even if you pay off your loan. You may be asked by the lender to pay additional costs depending on which payment type you choose and whether there are late or missed charges.
  • Nonsufficient Funds Fee – If your monthly payment is due but you fail to make it because your funds are not sufficient or the system can't access your account, then you will be charged a fee. For each payment that is returned or canceled, lenders charge $15.
  • Late Payment Fee – Make sure you meet your monthly deadline when your personal loan repayment period begins. Otherwise, you'll damage your credit because of a late payment. A flat fee is often charged by lenders to cover late payment fees. You can also avoid them. Some lenders charge a late fee as part of your payment.
  • Prepayment Fee – When you pay off a loan earlier than expected, lenders charge a prepayment fee. You're correct – when you pay off your loan earlier than scheduled, lenders may charge an additional fee. Some lenders call it an exit fee.

This fee is usually paid by borrowers who pay off loans in full prior to the final payment.

How to Avoid Paying Fees For Personal Loans?

“No hidden fees” is not always completely free.

The best thing to do is meet with several lenders before you decide to take out a loan. This will protect you from paying various fees.

It will depend on your specific financial situation but you will find that each lender will have their own pros and cons when you line them in a row. It is crucial to analyze your financial situation before you sign up for one lender.

Talk to a representative to be as transparent and clear as possible about the terms and fees associated with your loan.

Be thoroughly familiar and informed so that you can go ahead and take a personal loan. Personal loans are a great tool for managing your finances well.

We wish you the best in your search for the best loan.

What are the Common Terms for Personal Loans?

These terms will help you understand the process.

  • Installment Loan – A loan which is paid monthly by fixed payments.
  • Term– How long you will take to repay your personal loan.
  • Fixed-Rate – Personal loans have a fixed interest rate. It is possible to not consider one without it.
  • APR – Also known as the Annual Percentage rate. This includes the interest rate and fees associated with your personal loan.
  • Principal – The amount of the loan you borrowed from the lender.
  • Fixed payments – Monthly payments that are the same. These are often used with personal loans. They keep your monthly payments the same until the loan is paid off.
  • Consolidating Debt – This is when all your debts are combined into one loan. This can include your credit card bills and home bills.
  • Cosigner – A person who is able to sign a loan agreement with you. You may need to apply if your credit score or credit history isn't good enough. Have a cosigner to be eligible for a loan. If you are unable to repay the loan, they will be required to.
  • Credit Score – FICO number that lenders use to determine your likelihood of repaying the loan and making the payments on time.
  • Unsecured Loans – These loans cannot be secured by collateral. This could include a vehicle, boat, or home. If you fail to make payments, your possessions cannot be used to repay the loan.
Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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