An origination fee is a common cost that is often charged when you take out mortgages, auto loans and personal loans. Varying in cost by lender, the origination fee is a cost for borrowing money and the interest paid over time. While origination fees add to the total cost of a loan, they may be worth the expense if the loan comes with a low interest rate. So how do you know if an origination fee is worth it? It’s all about understanding the total cost of a loan.
What is Personal Loan Origination?
Loan origination is the complete process of applying for and getting a new loan. When you’re applying for a loan, you may come across a few steps in the process, so it can be helpful to know what to expect for each. The loan origination process can include pre-qualifying, filling out an application, and accepting your new loan.
Personal Loan Pre-Qualification Process
Pre-qualifying for a loan is a great way to find out what interest rate you could qualify for when you’re researching options. When you pre-qualify for a loan, you may receive a solicitation in the mail or may be able to find out online quickly. This step likely has no impact to your credit score.
Personal Loan Qualification
After you apply for a personal loan, a lender will review your application and see what they can offer. While the exact requirements to qualify for a personal loan vary by lender, here are a few factors that are likely considered:
- Your credit score
- A good debt-to-income ratio
- A means for repayment (Income)
Information Needed to Complete the Loan Origination Process
While applying for a personal loan has become quicker than ever, sometimes a lender will ask you to help verify the information you shared in an application. They want to make sure they are depositing money to the right person, who can take on new debt in their budget. To complete this step in the process, you may be asked to log in to your bank or provide a document like a bank statement or a W-2. It may be helpful to have a paystub in hand when you’re applying.
What is a Loan Origination Fee?
A loan origination fee is a fee that may be charged by a lender for processing your loan. You’ll often see origination fees charged on mortgages, personal loans and auto loans. Understanding an origination fee can help you compare the cost of borrowing money among lenders for the life of a loan that you’re applying for. Origination fees can also be called:
- Finance charge
- Upfront fee
- Origination charge
How Do Origination Fees Work?
Not every origination fee is created equal. Most origination fees are calculated based on a few factors that helped to determine what kind of loan offers were available. Some of the factors that can influence the origination fee include:
- Your credit score
- The length of the loan
- The information you provided in an application, like income
Lenders charge an origination fee to help pay for things like: Underwriting the loan, verifying documents and pulling your credit report.
How to Spot an Origination Fee
When applying for a personal, mortgage or auto loan, you can see if there is an origination fee when you review the Truth in Lending Statement. This document will show you the cost of the origination fee, how it was calculated, and how it factors into the total cost of the loan.
How Much Do Origination Fees Cost?
The cost of an origination fee will vary depending on the lender. The lender may charge a flat fee or a percentage of the total loan amount (Usually between 1-8%).
What You Should Know When Obtaining a Personal Loan with an Origination Fee
When applying for a personal loan, take the time to do your research. If you’re applying for a loan with an origination fee, review all the documents a lender provides you to see if there’s an origination fee and how much it will cost.
Then compare that to the total cost of your other offers. This is important because sometimes a personal loan with an upfront fee and a low APR may cost the same as one without origination fee but a higher APR.
Making a decision on which personal loan offer to accept can be hard. So stay focused on your long-term financial goals, do the math and pick the offer that works best for your financial goals.