What is an origination fee?
It is likely that when you are applying for a loan, among its characteristics, the term origination fee has been mentioned to you, so you may quickly wonder what it refers to.
It is likely that when you are applying for a loan, among its characteristics, the term origination fee has been mentioned to you, so you may quickly wonder what it refers to. As its name indicates, the origination fee is the amount that a financial institution charges its clients at the moment of contracting a service or product.
What is the origination fee?
Let’s start by defining what a commission is, it is the amount that a bank or financial institution charges for any transaction carried out for the client, generally this figure can be represented as a percentage of the transaction made or be a fixed amount.
Specifically, an origination fee is the amount that the client assumes to pay at the moment of acquiring a certain product, for example:
- Mortgage loan
- Point-of-sale terminal
- Automobile loan
- Personal loan
- Payroll credit
These commissions vary depending on the entity with which you contract the service, let’s see an example: in a mortgage loan the origination fee is 1%, it is indicated that it must be paid in local currency and this payment is only made once when the loan is formalized, however another mortgage loan may have 0% origination fee among its benefits.
What is 0% origination fee? It means that the institution has established among the characteristics of the product or by promotion, that there is no charge for obtaining it.
How is the origination fee calculated?
To give us an idea, the commission for contracting the loan you are being granted is 1%. This means that if the loan you were approved for is $100,000, the origination fee will be $1,000.
Specifically, an origination fee is the amount that the client assumes to pay at the moment of acquiring a certain product.
Tips for choosing your credit
Up to this point we have seen that different financial products may have some characteristics such as the origination fee, why should I take this element into account, and what other elements are important to consider when making an application? These are some of them:
Evaluate the origination fee
Regardless of the type of credit or financing you apply for, it is essential to always evaluate what the origination fee is, it usually appears in its characteristics, read carefully all the clauses of your contract that talk about this fee.
Sometimes you may find abusive clauses, so it is important to review in detail, on the other hand, it is necessary to have the information about the contracting commission because it is the cost, if any, of the product or service you are requesting.
Analyze your budget
Beyond the contracting commission, before applying for any loan, it is important to analyze your budget, expenses and income, to establish your payment capacity.
In addition to the origination fee, you should consider other elements of the loan, such as:
- CAT (Total Annual Cost)
- Fixed annual rate
- Ordinary interest
- Moratorium interest
- Collection expenses
In summary, knowing what your loan origination fee is is not a minor element, it is of utmost importance because it establishes how much you will have to pay to obtain the product you are applying for.