Origination Fee
An origination fee is a one-time charge a lender deducts from your loan proceeds at signing, typically 1-10% of the loan amount. So a $1,000 loan with a 5% origination fee disburses $950 to your account, but you repay based on the full $1,000. The fee is part of the cost of credit and is included in the APR calculation.
Origination fees compensate the lender for processing the loan and are most common on subprime and near-prime products. They’re charged once, at signing, and typically deducted from the loan proceeds rather than billed separately.
How origination fees affect the loan math
Because the fee is deducted up front but repayment is based on the full loan amount, origination fees increase the effective cost of borrowing. A $1,000 loan at 25% interest with a $50 origination fee costs more in real terms than a $1,000 loan at 25% interest with no fee: even though both have the same monthly payment and total of payments. The difference shows up in APR, which captures the fee impact.
What’s normal
For prime borrowers (FICO 700+), origination fees typically run 0-5%. For subprime borrowers, 5-10% is common. Some lenders waive origination fees in exchange for a slightly higher interest rate; whether that’s a better deal depends on your loan term: longer terms favor low-fee/high-rate, shorter terms favor high-fee/low-rate.
Always look at APR rather than the rate or fee in isolation when comparing loans with different fee structures.