“No such thing as a free lunch,” they say. And that’s especially true for money. Even when a loan has a low interest rate, it may have an origination fee.
Also called processing fees, or administrative fees, these are basically just ways for the lender to make a little more money.
Origination fees can range from 1% to 10% of the total loan, and there are two ways lenders charge origination fees.
You should be aware of which way you’re being charged. It could impact how much you borrow, or if you borrow at all.
Origination as Part of APR
Sometimes when a lender charges you an origination fee, it’s wrapped up into the monthly payment. This is usually the case for mortgages. You never actually pay a bill marked “origination fee” because it’s part of your escrow, monthly payment, and mortgage insurance bill.
The other way origination is charged is right up front, and this is the case in most personal loans. In these cases, if you borrow $10,000, and there’s a 10% origination fee, you’re actually only going to get $9,000.
That means if you needed that $10,000 exactly, to pay a specific bill or for debt consolidation, and they charge an origination fee, then you actually need to borrow more than the $10,000.
Should I Avoid Loans with Origination Fees?
That’s a matter of perspective. In my experience, most loans that don’t have origination fees make up that money by charging a higher interest rate.
That’s why it’s important to ask every lender, “What’s my bottom line monthly payment?” and “How much money will I receive?” If they can’t answer those two questions, walk away. After they do answer, make the decision that’s best for your expenses and income.