What's an Origination Fee, and Why Do I Need to Pay It?

If you’re looking to borrow money from a traditional lender, you might need to pay an upfront fee.
Last updated Sep 19, 2020 | By Lindsay Frankel
Loan paperwork and origination fee

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Taking out a large loan is a big decision, but it can lead to some pretty exciting prospects. A personal loan could help you consolidate your debt or finance a larger purchase, like a vacation or a wedding. And a mortgage loan could make your dream home available to you.

If you’re new to borrowing money, you should be aware that you’ll always pay the lender back more than you initially received in credit. Most lenders charge interest and other fees, and some will charge an origination fee, especially on larger loans.

What is an origination fee?

An origination fee covers the cost of processing your loan application before you receive the money you intend to borrow. This can cover the cost of the lender’s services, allowing them time to review your information and approve the loan. The origination fee may also be a source of revenue for the lender.

Origination fees are common with larger loans, such as personal loans and mortgage loans. A lender may also charge an origination fee for refinancing your student loans. Origination fees aren’t common with small-dollar, short-term loans.

How is the amount of the origination fee determined?

Typically, the origination fee is expressed as a percentage of the loan principal and falls somewhere between 0.5% to 1% of the amount borrowed. So, if you’re taking out a $10,000 personal loan, your origination fee might be anywhere from $50 to $100.

The lender will look to your creditworthiness when calculating the amount of the origination fee. If you have bad credit, expect to pay toward the high end of the range. Generally, the higher your credit score, the lower your origination fee will be. Having excellent credit also gives you some room to negotiate the fee with the lender, especially if the loan is quite large, like a mortgage.

How will the lender collect the origination fee?

Some lenders require a cash fee up front. In this case, always make sure the transaction is secure. Other lenders may choose to roll the origination fee into the loan, adding to the total amount you’ll need to pay back over the term of the loan. And still others may subtract the origination fee from the money you receive from the lender; for example, if you arrange to borrow $10,000 and the origination fee is $100, the amount of money you’ll have access to will actually be $9,900.

A warning about origination fees and “advance-fee” loans

It can be frustrating to be turned down for a loan due to bad credit, and some scam artists prey on borrowers’ desperation. The Federal Trade Commission warns consumers to beware of advance-fee loan scams, where con artists guarantee a loan, regardless of credit score, in exchange for an upfront fee. Also be cautious of loan offers that come via telephone, since it’s illegal for lenders to promise loans over the phone in exchange for upfront fees.

Even if you find the lender yourself online, check with your attorney general’s office to make sure the company is registered in your state. If it is, it will be required to disclose certain information to you, and its fees should be clearly and prominently identified.

Don’t trust a lender that promises you money without a credit check. Never give them your personal information, and don’t pay “fees” to an individual or send a wire transfer, money order, or gift cards to the company.

Why does the origination fee matter?

When choosing between lenders, knowing the amount of the origination fee and how it will be collected is important. That’s because it can impact the total cost of your loan. A lender that doesn’t charge an origination fee may not necessarily be offering a cheaper loan, since the lender might be accounting for the fee with a higher APR (annual percentage rate).

Here are some examples of how a lender might collect an origination fee and how that impacts the total cost of the loan:

Loan amount Origination fee How it’s collected APR Term Total cost
$10,000 $100 Up front 5% 5 years $11,322.74
$10,000 $50 Rolled into loan 5% 5 years $11,379.95
$10,000 $0 N/A 6% 5 years $11,599.68

Looking at that table, you can see now that the origination fee isn’t the only factor influencing the cost of a loan. A smaller origination fee that’s rolled into the loan will end up costing you more in the long run, and sometimes no origination fee doesn’t end up being a good deal if it comes with a higher APR. In this scenario, the loan with the highest origination fee actually ends up being the lowest-costing loan in the end.

Take the time to research and compare your loan options

A loan origination fee isn’t necessarily a bad thing. Sometimes, paying a fee up front may be your best option. Consider the APR, the term of the loan, and how the origination fee is collected.

Lenders won’t charge an origination fee until after you’re approved for a loan, and there’s room for shopping around during the preapproval process. Most lenders use a soft credit check to see if you prequalify, which means your credit score won’t be impacted. So you can visit a handful of lenders, find out if you qualify, and discuss what they can offer. Then take the time to do the math and figure out your least costly option.

To be sure you get the best array of options and find out how to get a loan that meets your needs, put your best foot forward when it comes to your credit score. Before you apply for a loan, avoid any behavior that might negatively impact your creditworthiness, and focus on steps that will help you build your credit score. Once you’re prepared, do your research to find the best loan offer.

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Author Details

Lindsay Frankel Lindsay Frankel is a Denver-based freelance writer who specializes in credit cards, travel, budgeting/saving, and shopping. She has been featured in several finance publications, including LendingTree. When she's not writing, you can find her enjoying the great outdoors, playing music, or cuddling with her rescue pup.