The number of Americans taking out loans is on the rise. In the last year alone, more than 20 million Americans took out personal loans — more than double the number from the same period in 2012.
Perhaps you’re taking out a personal loan to buy a new car or improve your house, or maybe you’re taking out a business loan or securing a mortgage for your dream place. Whatever type of loan you’re applying for and whatever the amount, you’re likely to come across loan origination fees. Although these can end up adding a chunk to the cost of securing a loan, they aren’t necessarily a bad thing.
What Is a Loan Origination Fee?
A loan origination fee is a charge made by the loan provider to cover its administrative costs, and is sometimes referred to as an underwriting or processing fee. It might be charged as a percentage of the overall loan or as an additional fee. Either way, it should always be a predetermined amount and definitely shouldn’t come as a nasty surprise farther down the line. As well as covering costs of providing the loan, the origination fee is also a way that lenders make money — think of it as a commission.
How Much Will My Loan Origination Fee Be?
The amount you pay for a loan origination fee will vary greatly. As a rule of thumb, most mortgage providers in the U.S. will charge around 0.5–1% of the total loan amount. For a 1% fee, the lender will earn $100 from every $10,000 you borrow.
Some loan providers may charge a set rate. For example, Regions Bank charges $1,397 for every mortgage origination fee.
For personal loans, you can expect to pay a higher rate of between 1–6%, while business loans are likely to set you back between 1–5%.
Be wary of providers who boast of “no origination fees.” No lender is going to give you a loan for free, so you’ll end up paying such fees in other ways, most likely through increased interest rates.
Factors that Might Affect the Amount You Pay
Several factors can affect the total amount charged. For example, the length of time for paying back the loan and the amount you are borrowing will have an impact.
Your credit score is also likely to be taken into account. A decent score means that in the provider’s eyes, you’re less likely to default on your loan. Try ScoreMaster for an easy, fun way to boost your credit score in just 20 days.
How to Reduce Your Loan Origination Fee
A loan origination fee isn’t necessarily set in stone — there is often room for negotiation, particularly if you are taking out a large loan such as a mortgage. There’s certainly no harm in attempting to reduce the fee, especially if you have a decent credit score.
Get mortgage estimates from at least three providers so you have ammunition when it comes to negotiating. Of course, a lender won’t want to work for free, so be aware that a reduced loan origination fee may come with a sting in its tail, such as higher interest rates. This may mean you end up paying more over a longer period of time.
For personal loans, a successful negotiation is less likely, so it’s worth shopping around to make sure you get the best deal.
When it comes to loan origination fees, it’s best to do your research. While some providers may have temptingly low fees, this won’t necessarily mean you save money in the long run, so weigh up what works best for your unique set of circumstances.
To learn more about how ScoreMaster can help you achieve your best possible credit score — and get your best possible loan — contact us at ScoreMaster.com.
*Legal Disclaimer – ScoreMaster is a patent-pending educational feature simulating credit utilization’s effect on credit scores via payments or spending. Your results may vary and are not guaranteed.
References:
- https://www.marketwatch.com/story/americans-are-feeling-better-about-their-chances-of-getting-a-loan-heres-why-theyre-feeling-so-good-2020-02-11
- https://www.investopedia.com/terms/o/origination-fee.asp
- https://www.finder.com/personal-loan-origination-fee
- https://thelendersnetwork.com/loan-origination-fee/
- https://www.finder.com/business-loan-costs