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Interest rates, loan terms, monthly payments—there's a lot to think about when you're shopping for a loan. Whether you're seeking a mortgage, auto loan, personal loan or student loan, you also need to take into account the fees lenders impose, such as loan origination fees. An origination fee is a one-time fee lenders charge to cover the cost of processing your loan.
What Is an Origination Fee on a Loan?
An origination fee is a borrower payment that some lenders require to cover the miscellaneous costs involved in making the loan. For example, the origination fee might pay for the cost of reviewing and processing your loan application, preparing loan documents and underwriting the loan (that is, verifying that you're qualified).
Some lenders may impose separate charges for document preparation, loan processing and underwriting. Others combine all these costs into the origination fee.
These types of loans typically have origination fees:
Loan origination fees are generally expressed as a percentage of the amount you're borrowing. Origination fees may be included in your closing costs and paid upfront, rolled into your loan balance and paid off over time, or deducted from the loan proceeds you receive.
How Much Are Loan Origination Fees?
Origination fees typically range from 0.5% to 8% of the amount you borrow. Your origination fees may be higher or lower depending on the type of loan you're getting, your credit score and other factors. For example, mortgage loan origination fees are usually a lower percentage, while personal loan origination fees tend to be on the high end. Federal student loan origination fees are set by Congress and are 1.057% for direct subsidized and unsubsidized loans and 4.228% for PLUS loans first disbursed on or after October 1, 2020.
A loan with a lower origination fee isn't necessarily the best choice for your budget, however. Since origination fees help lenders make money from loans, lenders may raise interest rates to compensate for reducing origination fees. Often, a loan with a lower interest rate and a higher origination fee costs less than one with a lower origination fee and a higher interest rate.
Learn more >> How to Reduce Your Total Loan Cost
Origination Fee Example
Suppose you want a three-year, $25,000 personal loan to pay for your wedding. Here's how the math works out, both with and without an origination fee.
| Loan 1 | Loan 2 | Loan 3 | |
|---|---|---|---|
| Loan amount | $25,000 | $25,000 | $27,250 | Interest rate | 15% | 9% | 9% |
| Origination fee | 0 | 8% ($2,000) | 8% ($2,180) |
| Loan amount received | $25,000 | $23,000 | $25,070 |
| Monthly payment | $866.63 | $731.39 | $797.22 |
| Total interest paid | $6,198.80 | $3,330.18 | $3,629.89 |
| Total loan cost | $31,198.80 | $28,330.18 | $30,879.89 |
Although Loan 1 has no origination fee, the higher interest rate means that over time, you'd pay $2,868.62 more than for Loan 2. Monthly payments are higher too.
However, you also receive $2,000 less for Loan 2. Loan 3 shows how you could get the full $25,000 you need by borrowing $27,250. Even with the origination fee, your monthly payments and total interest paid are still less than those of the no-fee loan.
How Origination Fees Are Determined
Several factors determine loan origination fees.
- Type of loan: Federal student loan origination fees are federally regulated; private student loans may or may not have origination fees. Generally, origination fees for mortgage loans are lower than those for personal loans.
- Loan term: Long-term loans may have lower origination fees than short-term loans. Since longer-term loans generate more interest, lenders may be able to reduce origination fees.
- Loan size: Origination fees are typically a percentage of your loan amount. The more you borrow, the higher your origination fee is likely to be.
- Lender: Just as lenders charge different interest rates to attract borrowers, various lenders may offer lower origination fees for the same type of loan.
- Your credit score: Borrowers with good credit scores may qualify for lower origination fees. Although lenders' criteria and credit scoring models may vary, typically a FICO® Score☉ of 670 to 739 is considered "good," 740 to 799 is "very good" and 800 or higher is considered "excellent."
How to Save on Origination Fees
With the exception of federal student loans, you usually have several options for saving on origination fees.
- Choose a loan with no origination fee. Some lenders offer loans without origination fees. Although these loans typically have higher interest rates than loans with origination fees, the tradeoff may be worthwhile if you want to keep upfront costs to a minimum.
- Negotiate with the lender. If you have good credit, lenders may be willing to lower origination fees. Keep in mind that this usually means a higher interest rate or longer loan term, which can make the loan cost more.
- Compare costs. hop around before applying for a loan. Legitimate lenders disclose origination fees upfront; mortgage lenders are legally required to do so. In addition to origination fees, compare each loan's interest rate, terms and other fees. Origination fees are included in a loan's annual percentage rate (APR); compare APRs to help find the loan with the lowest annual cost.
- Request lender credits. Mortgage lenders may offer credits to cover loan closing costs, including origination fees. Credits are rolled into the loan, so you'll be paying them off—with interest—for a long time. However, closing costs can total tens of thousands of dollars; using credits means you can put that money toward your down payment.
- Get seller concessions. Home sellers sometimes pay the buyer's origination fee, especially in a buyer's market.
Other Common Loan Fees
In addition to origination fees, there are other loan fees you may encounter.
Miscellaneous Fees
Fees that can apply to any type of loan include:
- Loan application fee: Some lenders charge an upfront fee for processing your loan application.
- Late fee: Lenders often charge a fee if your loan payment is late. A payment more than 30 days past due can also negatively affect your credit.
- Prepayment fee: If you pay off your loan early, the lender loses out on interest you would have paid throughout the life of the loan. To recoup this loss, many lenders charge prepayment penalties, or fees if you repay your loan before its term ends.
- Payment processing fee: Some lenders charge a fee to process each loan payment. These fees are generally rare and may apply to specific payment methods, such as checks.
- Brokerage fee: Services that match borrowers with loans sometimes charge a brokerage fee.
If credit report, underwriting, processing and document preparation fees aren't rolled into your origination fees, they may show up separately. Check your loan terms to ensure you aren't charged the same fee twice.
Mortgage Fees
Mortgage lenders may charge fees including:
- Appraisal fee: This pays for an appraisal to verify that the home is worth the amount you're borrowing.
- Home inspection fee: Lenders that require a home inspection before approving your mortgage may charge you for this service.
- Title insurance fee: This fee pays to transfer the house's deed into your name and protects your lender against claims to your home prior to you purchasing it.
- Recording fee: This fee pays to record the deed to your home with local government agencies.
Learn more >> Everything You Need to Know About Mortgage Fees
Auto Loan Fees
Car buyers may see these fees:
- Registration fee: These are fees you pay to register your new car with your state's motor vehicle department.
- Vehicle inspection fee: You may be charged these fees if your state requires an inspection to ensure the vehicle meets state standards.
- Destination fee: Also known as shipping fees, these cover the expense of transporting the vehicle to the dealership.
- Preparation fees: These cover the dealer's costs of getting the vehicle ready for you and also can be called dealer's fees.
Frequently Asked Questions
Federal student loan origination fees aren't negotiable, but most other origination fees are. In exchange for reducing origination fees, however, lenders may raise the interest rate or increase the loan term. Experian's APR calculator helps you compare the overall cost of different loans, including fees.
An origination fee pays the lender's upfront costs for processing a loan, so you generally can't get it back. In some cases, however, you may get part of the origination fee back if you prepay your loan. Check your loan terms or ask your lender if origination fees are ever refundable.
Mortgage origination fees (even those paid by the home seller) are deductible on your federal income taxes for the year you closed on the purchase. The home must be your primary residence to qualify for the deduction.
The Bottom Line
When you're looking for a loan, be sure to consider all the costs—including origination fees. Maintaining good credit can cut the cost of loans by qualifying you for lower interest rates and better terms. Check your credit report and credit score before going loan shopping to see where you stand. Paying down credit card debt and making timely payments could help improve your credit score if it needs a boost. You can also use Experian's personal loan comparison tool to find loan offers based on your credit profile.