An origination fee is a charge some lenders apply for processing a new loan, often taken from the loan proceeds or added to the balance. It is part of the cost of borrowing and is commonly reflected in the APR.
An origination fee covers a lender's cost of underwriting, processing, and funding a new loan. It is frequently expressed as a percentage of the loan amount or as a flat charge, and it may be deducted from the funds you receive or added to the amount financed. Because it is a required cost of obtaining the loan, an origination fee is generally included in the annual percentage rate (APR) disclosure, which makes the APR a useful figure for comparing offers. Whether a loan carries an origination fee, and how it is charged, varies by lender and product and is stated in the loan's fee disclosure. It is sometimes called a processing fee or an administration fee.
Lenders use origination fees to cover the work of setting up a loan: reviewing the application, verifying documents and preparing the agreement. When the fee is deducted from the proceeds, the borrower receives less cash than the loan amount but repays the full amount; when it is added to the balance, the borrower pays interest on it as well.
Because an origination fee is a charge imposed as a condition of getting the loan, it is generally part of the finance charge disclosed under the Truth in Lending Act. That makes it visible when offers are compared on their disclosures, even if the fee itself is described in the paperwork as a processing or administration charge.
Some lenders let borrowers choose between a loan with an origination fee and a somewhat higher interest rate without one. Which works out cheaper depends on how long the loan will be outstanding: a fee paid up front costs the same whether the loan is repaid early or late, while a higher rate costs more the longer the balance remains.
An example
A borrower is approved for a personal loan that carries an origination fee deducted from the proceeds. The disclosure shows the loan amount, the fee, and a smaller amount financed that the borrower actually receives. When comparing this offer with one that has no origination fee, the borrower looks at the finance charge and the total of payments rather than at the loan amount alone.
Common misconceptions
Myth: If the fee is taken out of the loan, it does not cost anything.
In fact: A deducted fee still costs money: you repay the full loan amount but receive less cash.
Myth: All personal loans charge an origination fee.
In fact: Whether a loan has an origination fee depends on the lender and the product; the fee disclosure in the agreement says so either way.
Myth: An origination fee is refunded if you pay the loan off early.
In fact: Refund rules depend on the agreement and state law. Many origination fees are earned when the loan is made, so the agreement is the place to check.
What to check
- Whether an origination fee applies and how it is calculated.
- Whether it is deducted from the proceeds or added to the balance.
- The amount financed compared with the loan amount.
- Whether any part of the fee is refundable if you repay early.
How this applies at Desert Rock Capital
At Desert Rock Capital, the amount, each biweekly payment and the total cost of the loan are set out in writing before you sign anything, so the loan agreement is the place to see every charge that applies. If you are approved, you choose what to accept, and there is no prepayment penalty if you repay early.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.