On The Money

Loan Origination Fees: Unhidden, Yet Still Surprising

LoansInterest rates are not telling the whole story of your personal loan. If you plan to borrow money anytime soon — particularly from an online firm — it would serve you well to check how much the origination fee is.

The Unseen Origin

Countless lending institutions are now part of the push to streamline and simplify the process of taking out loans online. But the transition from paper-based lending to digitally providing financial assistance cannot be without its own hurdles. For customers of online lending firms, that hurdle comes in the form of an origination fee, or costs of processing a new loan application, used as compensation for putting the loan in place.

Origination fees are not exactly exorbitant, considering the size of the loan. The Federal Housing Administration states the average origination fee goes between .5% and 1% of the amount owed, which can make all the difference when comparing interest rates between different lenders. Origination fees cover the processing, underwriting, and other administrative services involved with the loan, and ever borrower must see to it that their creditor informs them of the exact rate of their origination fee, on top of the interest rate of the loan itself.

The Power of Knowing

‘It’s important to comparison shop on the basis of APR because it puts everything on an apples-to-apples basis,” says Greg McBride, CFA, Bankrate’s chief financial analyst. ‘Whether you pay the fee directly or out of the loan proceeds. Either way, you’re paying the fee’, he adds.

McBride stresses the importance of understanding origination fees, simply because too many debtors go by the approval of their loans without ever knowing of this ‘supposedly non-hidden’ cost. Even worse, there are cases where lenders straight up overcharge their clients through origination fees.

Origination fees must never be something debtors fail to see coming. Since they are the ones strapped for cash, to begin with, a great step towards making a financial recovery would be to stop the occurrence of surprise expenses.

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