What Is an Origination Fee?

Definition & Examples of Origination Fees

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An origination fee is charged by a lender to cover the costs of processing a loan. It may be used to pay for preparing documents, processing your application, or underwriting your loan. In most cases, the fee is quoted as a percentage of the total loan amount.

What Is an Origination Fee?

An origination fee is money a lender may charge you to complete a loan transaction. Many types of loans, including personal loans, student loans, auto loans, mortgages, and home equity loans, come with origination fees.

You may have to pay an origination fee up front when you close on your loan. Alternatively, the fee may be deducted from your loan proceeds or rolled into the total loan amount so you can repay it over time.

Alternate names: Administrative fee, processing fee, underwriting fee

How Origination Fees Work

Not all origination fees are created equal. The type of loan you take out, your credit history, and the lender you choose may affect the amount of your origination fee.

For example, Upgrade, a personal loan lender, charges origination fees of up to 8%. Once you get approved for a loan, it’ll deduct the origination fee from your total loan funds.

Figure, a lender that offers home equity lines of credit (HELOCs), charges an origination fee of 4.99%. It includes the origination fee in the interest charge.


Payoff
, another personal loan lender, has origination fees that range between 0% and 5% of the loan amount. Just like Upgrade, it’ll subtract the fee from your loan amount right off the bat.

Let’s say you take out a personal loan for $5,000 that requires you to pay a 3% origination fee. You’ll be on the hook for $150 (3% of $5,000). If the lender deducts the origination fee from your loan at the beginning, like Payoff and Upgrade, you’ll only receive a loan amount of $4,850. This is important because if you actually need $5,000 for whatever expense it is you’re using the loan for, you’ll need to take out more than $5,000 in order to account for the origination fee.

If you believe an origination fee is too high, ask your lender if they’ll lower the fee or even waive it. There’s no guarantee that negotiating will work, but it’s worth a shot, especially if you have good credit.

Do I Need to Pay Origination Fees?

While an origination fee is not a requirement for all loans, many lenders charge them to cover the costs of things like gathering documents, verifying the accuracy of the information provided, requesting information from employers, and ensuring your application meets certain criteria. 

While some lenders advertise “no origination fees,” they may charge you a higher interest rate or another fee to make up for it. So it’s a good idea to compare your options and do the math. You may find that a loan with an origination fee is more affordable than a similar loan without one.

Average Cost of Origination Fees

Origination fees are typically a percentage of the total loan amount, and they vary significantly depending on the type of loan, the lender, your credit history, and other factors. If you take out a home loan, for example, your origination fee may range from 0.5% to 1% of the amount you borrow. A personal loan may require you to pay a higher origination fee of 1% to 10%, depending on your credit.  While these percentages may not seem like a lot, they can add up depending on the size of your loan. For example, if you take out a loan for $5,000, a 1% origination fee is only $50. However, if you take out a loan for $50,000, the origination fee is $500.

For federal subsidized student loans taken out on or after Oct. 1, 2019, and before Oct. 1, 2020, the origination fee is 1.059%.

Alternatives to Origination Fees

In addition to origination fees, you may have to pay other fees when you take out a loan. While these fees differ by loan type, you may encounter a few of the following when shopping for a loan.

  • Appraisal fee: An appraisal fee, which is widely seen in home loans, pays for the cost of having a property appraised. It's intended to ensure the loan is large enough to cover the value of a home you intend to buy. The cost varies based on your home’s location, the appraiser’s experience, and the complexity of the process.
  • Late fee: Depending on your lender and type of loan, if you don’t make your payments on time, you may have to pay a late fee. 
  • Prepayment fee: Lenders of various loan types may charge a prepayment fee if you pay off all or part of your loan early.

Before you sign on the dotted line and accept any loan, make sure you’re aware of all of its fees. The fees should be clearly outlined in your loan agreement, but if they’re not or if you’re unclear about a certain fee, don’t hesitate to ask the lender. 

Key Takeaways

  • An origination fee is what a lender charges for processing a loan.
  • Typically, an origination fee is a percentage of the total loan amount borrowed. 
  • While origination fees aren’t required, many lenders who waive them charge higher interest rates or other fees.

Article Sources

  1. Upgrade. "What is an origination fee?" Accessed Sept. 29, 2020. 

  2. Figure. "Figure Home Equity Line." Accessed Sept. 29, 2020.

  3. Payoff. "Rates and Terms." Accessed Sept. 29, 2020.

  4. Quicken Loans. "Mortgage Origination Fee: Everything You Need To Know." Accessed Sept. 29, 2020.

  5. LendingClub. "Personal Loan Rates and Fees." Accessed Sept. 29, 2020.

  6. OneMain Financial. "Loan Fees." Accessed Sept. 29, 2020.

  7. Federal Student Aid. "Understand How Interest Is Calculated and What Fees Are Associated with Your Federal Student Loan." Accessed September 29, 2020.

  8. American Society of Appraisers. "Appraisals FAQ Everything You Want to Know About Appraisals and Appraisers." Accessed Sept. 29, 2020.

  9. Consumer Financial Protection Bureau. "What is a prepayment penalty?" Accessed Sept. 29, 2020.