If you are in need of some money at the moment be it to pay for school, or for expenses, or for any other reason and you don't happen to have the cash for it.
So either way you are looking to get a loan but at the cheapest price so you don't have to pay back a lot more to what you borrow. For this, you'll need some questions answered and one of them is as follows in this article.
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What is an origination fee?
Origination fees are one of the factors that play into the total cost of your loan that you will end up borrowing and later paying back which can be troublesome if it is high, but this can be dealt with depending on the loan you are taking and whether it is worth paying that amount.
Let us figure out what it is.
In the simplest of terms, origination fees are the charges levied by the lender when processing a new loan application and its agreement. This basically covers the underwriting of the loan, pulling of a borrowers credit and verifying their identity and documents among others for the lender. So it is sort of a way to put your foot in the door to get into the sanctioning of the loan for yourself.
The origination fee is pretty common among many types of loans from the mortgage, a personal loan to a car loan. It usually is defined by a percentage of the total amount that is to be borrowed and usually lands anywhere between 1-6%.
Many a time the lenders determine your origination fee based on your creditworthiness. So if you have a less reliable or lower score than what is expected of or otherwise a bad credit history which may make the lender feel that you are a risk comparatively he/she will be more inclined to charge you a higher origination fee. So keep your credit history in good terms and a good credit score to make sure you avoid paying a high origination fee.
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So the process for collecting origination fees are as follows -
The process of an origination fee is complicated as it is usually determined after the loan has been approved, agreed upon by the borrower and signed for which is when it is charged and on upfront when the loan application is submitted.
The way origination fees are charged differs from lender to lender as the policies differ. [Also Read: Private student loans - Best lenders and repayment options ]
Some lenders tend to club the origination fees with the loan balance or principal amount so in that instance if you have a loan amount of $15,000 with a 2% origination fee then the total balance to be paid by you as your principal will become $15,300.
So in this way, the origination fee of $300 dollars which is 2% of $15,000 is taken and added to your principal to make a total payable principal of $15,300.
Yet, others have a different approach and do so by deducting the origination fee from the disbursed funds.
A loan balance of $20,000 with a 3% interest rate would end up being disbursed to you to be only $19,400. This is because the origination fee of 3% on $20,000 is $600 which is deducted from the disbursed amount and the remaining $19,400 sent to you.
Occasionally some lenders will outright ask you to pay the origination fee in cash instead of deducting it from the loan amount, but this is most often seen in mortgage loans where this amount is usually included in the buyer's closing costs.
Although it is less often borrowers should be on the lookout for advance fee scams where they guarantee you a loan even with a bad credit history and charge you with a high origination fee or have hidden costs which could be trouble for the borrower.
The borrows are warned about these scams from the federal trade commission and are asked to be diligent and go research on the lenders and the fees they charge to avoid being scammed by advance fee loan scams. [Also Read: What are student loan scams? ]
Comparing loans with an origination charge
Since the origination fee is added to your total loan amount while borrowing you will have to keep it in mind while deciding the amount you're going to borrow.
While comparing different loans for interest rates and their terms, you will also have to keep in mind to have a look at their origination fees so you make sure you're getting the best deal.
[Also Read: Interest rate for student loans ]
A loan without any origination fees could always be cheaper than one with it. And it is definitely possible to find some loan types or lenders who would be offering a loan without any origination fees.
If you decide to take a personal loan with no fee, you should consider a lender that doesn't charge it, such as So-fi or Citizens Bank, if you can qualify for one with even a single lender then you could just possibly save a lot of money for yourself.
Although no fee lenders sound great, most of the times they'll find ways to cover these extra costs one way or another, so beware.
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Some lenders tend to fix a higher interest rate to cover for the costs of not charging an origination fee so keep a lookout on the APR being levied on your loan, and make sure that you don't end up paying a lot more over the life of the loan than an origination fee would have costed you.
Comparing loan APRs with the origination fees
To find the best deal and the loan that gives you the best interest rates and origination fees you'll have to do some serious digging. You will have to figure out what the costs will be and have to check out offers from different loan companies and then compare the total costs of the loan from each of them and come to a conclusion.
Most lenders these days offer to give you an offer by doing soft credit pulls which checks for your creditworthiness and then get you a good loan offer based on that. So go for lenders that look promising and also apply for pre-approval of a loan.
After getting a couple of offers in your hand. Sit down and have a look at the different APRs of the loans having similar terms, their origination fees, and their estimates monthly payments.
While you are comparing the various APRs from the different loans also check if the origination fees are included in that or not. Depending on how the loan fee is charged the change might or might not be reflected on the APR.
[Also Read: What are APR and APY? ]
If everything is included under the APR, you should be able to do a side by side comparison of all these loans across all aspects and see which ends up costs you with the least interest rates.
Making a note of the total loan costs
Keep in mind you will have to compare the origination fees of these loans if they aren't included in the APR and depending on how the different terms are offered you should have to compare the interest rates with the origination fees to see which ends up being the best deal for you.
Have a mindset of what is most important to you
Look for what you need and not what you want, because you might not want to pay an origination fee but if that leads you to make higher monthly payments it isn't really productive. So decide what you're requirements are.
If you don't mind the high monthly payments then the origination fee can be foregone but if you want to have low monthly payments with a less interest rate to deal with then make a loan with an origination fee that has low monthly payments to satisfy your needs.
Also, you can choose to pay more per month with a short term so as to not pay a lot on interest at the end of the loan term.
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If you have a credit score on the lesser side and all your loans that qualify for have an origination fee. Then many lenders with less strict credit eligibility will also charge an origination fee, but this can't be avoided since you definitely need the loan.
Also, you may consider the origination fee if it does give you the financing that you are looking for. The best way to figure this out it to have good research on all your options and take time in making the choice of which loan and lender might be right for you.
Is a loan origination fee negotiable?
Yes, it is possible to get your loan origination fee reduced by negotiating with the loan servicer. This can be done if you have a good credit score. You loan origination fees stand usually anywhere between 0.5% - 1%.
So depending on how easily your loan has a chance of being approved you can ask the servicer to get you an origination fee reduction.
Can loan origination fee be waived?
Yes, it is possible but at the cost of higher interest rates. As this origination fee is usually where the loan servicer or lender tends to make a profit. They will either charge you a good amount or percentage of the loan amount being applied for as the origination fee or they can be asked to charge you a flat rate origination fee.
Usually, waiving the fee incurs a high-interest rate for the term of the loan and may cause you to end up paying more than you would have had you paid the origination fee at the beginning.
Where can I find my loan origination fee?
You should be able to find the origination fee in the terms and conditions and also by adding up the additional charges that you are incurring when you apply for a loan such as the loan servicing cost, the costs of verifying the documents of the borrower, the costs of credit pulls, the costs incurred by the servicer for the duration of the application process.
Most often all of these are mentioned on the loan document while applying and on the final pre-approval sheet.
What is included in the loan origination fee?
The costs included in the loan origination fee are closing costs of the loan, application fee, credit report, survey and more.
Example - A mortgage loan of $200,000. The lender charges you a 1% (or 1 Point) origination fee which amounts to $2,000.
What is the difference between loan origination fees and points?
Loan origination fees are usually the fees that you are required to pay at the end of the loan application and also the discount points fee that all you to reduce your interest rate and therefore the monthly payments also.
Can you negotiate closing costs?
Closings costs are usually hefty if not managed properly. Usually, when negotiating a loan the lender shall give you a loan estimate or a good faith estimate which details what the closing costs could be like.
Are loan origination fees refundable?
The origination fee is a non-refundable fee or at least you are not entitled to the refund of the origination fee. Hence it is disguised as a prepayment penalty. Although this notion of the loan origination fees being a prepayment fee is wrong as the origination fee is just embedded into the loan to seem like a prepayment fee.