Financial Literacy
Personal loan terminology can make the borrowing process confusing. Defining those terms is important so that you can make the best decisions based on your financial goals. One term to consider is, “origination fee.” What is an origination fee? It’s a one-time expense often charged when you take out mortgages, auto loans, and personal loans. While these fees add to the total loan cost, they might be worth it if the loan has a low interest rate. So, how do you weigh the pros and cons of an origination fee? Let’s break it down.
What is personal loan origination?
Loan origination is the entire process of applying for and obtaining a new loan. You may encounter several steps when applying for a loan, so it’s helpful to know what to expect. 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 helps you find out what interest rate you might qualify for when researching options. You may receive a loan offer in the mail or online telling you that you pre-qualify. Generally, you can see the offer quickly and decide if it’s right for you. This step likely has no impact on your credit score.
Personal loan qualification
After you apply for a personal loan, a lender will review your application to see what they can offer. While the exact requirements vary by lender, most factor in:
- Your credit score
- Your debt-to-income ratio
- Your ability to repay (Income)
Information needed to complete the loan origination process
The application process for personal loans has become quicker over the years, but sometimes a lender will still ask you to verify the information you shared in your application. They want to ensure they are lending to the right person and that you can manage new debt. To complete this step, you may need to log in to your bank or provide a document like a bank statement or a W-2. Having a paystub handy can be helpful when applying.
What is a loan origination fee?
Loan origination fees are charges from a lender for processing your loan. You’ll often see these fees on mortgages, personal loans, and auto loans. Understanding the origination fee helps you compare the cost of borrowing money across different lenders. Origination fees can also be called:
- Finance charges
- Upfront fees
- Origination charges
How do origination fees work?
Not all origination fees are the same. Most are calculated based on factors that determine the loan offers available. Some factors influencing the origination fee include:
- Your credit score
- The length of the loan
- The information you provided in the application, like income
Lenders charge an origination fee to cover costs like underwriting the loan, verifying documents, and pulling your credit report.
How to spot an origination fee
When applying for a personal loan, mortgage, or auto loan, you can see if there is an origination fee by reviewing the Truth in Lending Statement. This document shows the cost of the origination fee, how it was calculated, and how it factors into the total loan cost.
How much do origination fees cost?
The cost of an origination fee varies by lender. The lender may charge a flat fee or a percentage of the total loan amount, usually 10% or above.
What you should know when getting a loan with an origination fee
Take your time with the personal loan application. Read all the documents the lender provides to see if there’s a fee and how much it will cost. Include that cost in the total and compare it with the total cost of any other offers. Sometimes a personal loan with an upfront fee and a low APR may cost the same as one without an origination fee but a higher APR. Stay focused on your long-term financial goals, do the math, and pick the offer that best suits your financial goals.
This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.
