Personal

Some Myths Around Loan Origination Fees (And What They Include)

4/11/22 Brian Cedeno

When you borrow money from a lender, it’s expected that you’ll pay back the full loan amount over a period of time. Knowing this, you start to look online for lenders that are willing to give you a loan estimate.

However, you’re skeptical about who to trust with your financial security. You don’t want to get duped into paying way more than you owed in the first place. You might expect to see an interest rate attached to your loan, meaning that you’ll be paying extra cash on top of your original loan since the lender was there to provide you with the cash.

Nevertheless, you’re not expecting to see any other fees on top of what you owe for the interest rate, but is this really the case? Do lenders charge processing fees on a loan? What about documenting and verifying your loan application? The short answer is yes – lenders charge a processing fee after you apply and get approved for a loan. But do they always charge this fee? And when do you have to pay this fee? Will you get in trouble if you don’t pay it?

In this guide, we’ll discover what a loan origination fee is, how an origination fee is “basked” into your loan repayment, what makes it different from personal loan interest rates, uncover the myths around origination fees, and find out which financial products come equipped with an origination fee.

Table of Contents

  • Why lenders charge origination fees
    • What is a loan origination fee?
    • Personal and business loans
    • Mortgage loan origination fees
  • Myths and truths of origination fees
    • Myth 1: Paying the fee before a loan is approved
    • Myth 2: Credit score and necessity
    • Myth 3: Lenders who offer zero origination fees
    • Myth 4: Negotiation of an origination fee
    • Myth 5: How to pay an origination fee
  • Different fees for different products
  • Conclusion

 


 

The Reason Why Lenders Charge A Loan Origination Fee

The ways that lenders make money don’t always seem clear. Some charge higher interest rates for a short-term loan, some charge an application fee for submitting an application, and some charge a processing fee for documentation.

Most of the time, a lender will charge what they think is fair to the customer, regardless of how controversial the pricing may be. While most lenders charge smaller fees for miscellaneous costs, such as a late payment fee, they also charge an origination fee.

What is a loan origination fee?

A loan origination fee is a cost charged by a lender to the borrower for processing a loan. An origination fee is usually priced as a percentage of the total loan amount, typically ranging from 0.5% to 1.0% for the average loan product. In some cases, an origination fee charged by a lender can be up to 2% for home loans.

Lenders typically charge origination fees to cover their costs of making loans to borrowers. Origination fees cover lending services such as processing, underwriting, and funding a loan. Whether you’re applying for a personal loan or a mortgage, these fees can increase the cost of borrowing and are usually added to the annual percentage rate (APR) of a loan.

This one-time charge is paid out after the loan is disbursed to you, and is not included in the monthly payment on your loan.

Mortgage origination fee

Most borrowers are familiar with an origination fee since they’ve become popularized through their mortgage lender. Most mortgage companies make their money through mortgage origination fees, which are sort of like a commission for making the home loan.

Even then, we as consumers don’t like paying extra for things. That’s why most mortgage lenders give people the option to discuss rates; mortgage origination fees can be negotiable. You can negotiate with the lender to have the underwriting fee reduced or waived, but reducing any fees usually means paying a higher interest rate on a loan amount.

This isn’t always the case though, since lenders want your business; lenders may forgo accepting a higher interest rate if you can present evidence of a better offer from a competing lender. When it comes time to close the deal on a mortgage loan, the mortgage origination fee cost is usually set in advance of the loan execution and is expected to be paid in full by the time of closing and is added to your overall closing costs.

Personal loan origination fee

For personal loans, an origination fee is also an upfront fee charged for making the loan. After qualifying for multiple loan offers from your lender, your loan estimate should have a cost range from 0.5% to 1.0% for the average personal loan.

How much you’ll be expected to pay in origination fees depends on what loan offer you’ve accepted from your lender. Again, origination fees are not a flat fee – they usually range from 0.5% to 1%. The easy part about applying for a loan is knowing that your lender will offer you diverse loan options based on your credit score, your credit history, and your personal finance profile. During the mortgage qualification process, this verification period may take longer.

When seeking out a personal loan, there’s plenty of advice and products that exist in the world. However, not every deal is a good deal. You should learn how to sift through the myths and seek out the truth in loan origination fees when applying for a loan.

 


 

The Myths and Realities of a Loan Origination Fee

Myth: Lenders ask for loan payments before loan proceeds are distributed.

It’s traditionally believed that some legitimate lenders will ask for partial or complete fee payments before you are granted the loan.

With the onset of a global digital economy, more and more illegitimate lenders have sprung up on the horizon. As internet safety and trade commissions work diligently to shut down illegal and scam businesses, they continue to pop up faster than they can be shut down.

Any company that requests payment before the origination of a loan should be a red flag. Be sure to vet any lender you consider doing business with before giving any confidential information.

Myth: The first offer is your best offer, especially if you have bad credit.

Since your credit isn’t the perfect credit score, you should take the first offer you get for a personal loan, right? In fact, this is completely untrue.

No matter your credit score, you will still have a variety of offers from different lenders. None of your bids may be at an ideal top tier of terms, but you will have a better choice between competitors if you have options to choose from. Communicate to your potential lenders that you are shopping around for rates and terms, and they may be able to offer you additional perks if you qualify.

Myth: Lenders who do not charge origination fees should be trusted immediately.

Sometimes we’ve heard someone say, “if you find a lender who offers no origination fees, you should count yourself as lucky and go ahead and sign the contract.” In reality, very little in life is anything actually free.

When a lender offers no origination fees, those fees often pop up in other places in the loan terms. Ask for transparency from your lender. Since it is a business transaction, it is perfectly normal to request all fees be clearly laid out and explained before you sign any contract.

Myth: Origination fees are non-negotiable and cannot be adjusted.

You should never accept a loan origination fee as is and always ask about flexibility or negotiation options. It is true that origination fees are likely non-negotiable in terms of being present. They won’t be going anywhere anytime soon because loan origination is how you get the money you need.

However, some lenders can use your credit history to make a case for overinflating your origination fees. Look for a lender that charges around 1% of the loan for an origination fee rather than those who think your credit deserves an 8% or higher origination fee.

Myth: Origination fees are not included in the annual percentage rate (APR)

This myth is tricky, as many lenders give the impression that there is only one way to pay origination fees, and your lender will tell you exactly what you should do.

There are numerous ways to include origination fees in the terms of the contract. Your loan originator may want to include the costs in a specific way, but work with your lender to advocate for yourself; it may be more advantageous for you to have them written differently. Depending on the way your fees are written, you may have to adjust your loan amount accordingly. Whether you want the fees adjusted into the total loan estimate or before is up to you.

 


 

Takeaway

For less myth and more reality-based information on personal loans and how to work through origination fees to your benefits, contact LoanMe today for additional information.

LoanMe offers personal loans with competitive repayment terms to well-qualified customers. The process of getting a loan can be confusing and stressful, but it doesn’t need to be. We provide a streamlined application process, and you can have money in your bank account as soon as the next business day.

Don’t wait any longer to get the money you need. Our loan application is simple, and you can have your money in as little as one business day. With LoanMe offering same-day funding, applying for a personal loan is an easy process. If you feel that LoanMe is the lender you need, then we’d be happy to help you find the right financing options and support you through the entire loan process.

Learn how LoanMe may be able to help you and see if you pre-qualify for a personal loan today. Happy hunting and good luck!

 


 

*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax, or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Wires are sent out by 5:30 pm EST Monday-Friday. The funds should appear in your account shortly thereafter, however, this is subject to your bank’s policy and procedures with receiving incoming wires. Copyright © 2022 LoanMe, Inc. All rights reserved. 

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