Origination Fees: The Charge That Comes Off the Top

What an origination fee is

The CFPB describes an origination fee as what the lender charges for making the loan: taking the application, underwriting it and funding it. It can be a flat amount or a percentage of the loan, and some lenders don't charge one at all, pricing the cost into the interest rate instead.

Under Regulation Z, loan fees, points and similar charges are part of the finance charge, the dollar cost of your credit. That's why they show up in the APR. A fee you pay at or before closing, including one subtracted from the proceeds, is a prepaid finance charge: it reduces the amount financed on your disclosure, so the gap between that number and the loan amount shows you the fee.

Three ways the fee gets collected

In 2018 the FTC sued an online lender, alleging it advertised "no hidden fees" while deducting an upfront fee, so that a borrower approved for $10,000 received $9,500. Whatever the marketing says, the amount financed on the disclosure tells you what you'll actually get.

What different fees do to the same loan

Here's one loan, $10,000 at 12% interest for 36 months, with four different fees deducted. The monthly payment is $332.14 in every case, because interest is charged on the full $10,000. What changes is the cash you receive, and so the APR.

The last column uses a simple rule: divide the amount you need by one minus the fee. For a 6% fee, $10,000 ÷ 0.94 = $10,638.30, rounded up to $10,639. Ask for the grossed-up amount if you need a specific sum, for example to pay off a card balance in full. The APR calculator does this math for any fee.

When a loan with a fee can still come out ahead

A fee isn't automatically bad. A lender may offer a lower rate with a fee, or a higher rate without one. Which is better depends almost entirely on how long you keep the loan. Compare two offers on the same $10,000: one at 10% interest with a 3% fee deducted, the other at 12% with no fee. Over three years they land almost level. Over one year the fee loan costs clearly more, because $300 spread over 12 payments weighs far more per year than $300 spread over 36.

• Short loans favor no fee. The fee is spread over fewer months, so it weighs more per year.
• Early payoff favors no fee. The fee is paid on day one. The disclosure must say whether you'd get any finance charge back if you prepay; for an origination fee, the answer is usually no.
• Long loans you'll keep to the end can favor the lower rate, even with a fee. Let the APR decide.

The same logic runs through APR vs. interest rate, which shows the APR calculation step by step, and comparing loan offers, which puts a fee loan next to two no-fee quotes.

How to spot the fee and push back

1. 1 Find the fee before you apply. Many lenders state their fee range on their rate pages; ask if it isn't listed.
2. 2 Compare the amount financed with the loan amount on each disclosure. The difference is the prepaid finance charge.
3. 3 Ask for a no-fee version. Some lenders will trade a higher rate for no fee. Compare both by APR, for the term you'll actually keep the loan.
4. 4 Quote lenders that don't charge one. Fee policies differ from lender to lender, so include a few that advertise no origination fee. A competing offer is your leverage.
5. 5 Gross up if you need an exact amount. Borrowing too little and topping up with a credit card defeats the purpose.

For servicemembers and dependents covered by the Military Lending Act, origination fees count toward the 36% Military Annual Percentage Rate cap, along with credit insurance and add-on products.

Common questions