What is an auto loan origination fee?

Posted 05.07.2023

No matter if it’s your first or next car, watch out for origination fees that lenders may ask from you. An origination fee is a one-time fee that lenders charge to cover the costs of processing your loan. So, being aware of what is an auto loan origination fee prepares you before shopping for a car loan.

In this article, we break down everything you need to know about auto loan origination fees and how they work.

What is an auto loan origination fee?

Lenders may charge you a loan origination fee when you apply for a car loan. This origination fee covers the costs related to your loan – from evaluating your application and creditworthiness to funding the loan.

Depending on your lender, the origination fee may be taken out from your total loan. This means you get less money upfront. But in other cases, lenders may also add the origination fee to your loan balance.

While origination rates may vary, typically, this is a percentage of your loan from 1% to 2%. So, let’s say you apply for a $40,000 car loan with a 2% origination fee. Meaning your origination fee is $800. Rather than receiving $40,000, you get $39,200 or you get charged for $40,800.

How do car loan origination fees work?

As mentioned above, lenders may either deduct or add the origination fee to your loan balance. To help you further understand how these fees work, here are two examples you can refer to:

Example #1

If you need $27,000 to buy a used car, you may take out a $27,000 loan to fund it. If your origination fee is 1% and the lender takes it out from your loan, you may not get the entire $27,000. Instead, you only receive $26,730, but you make your monthly car payments on the $27,000 loan balance.

Example #2

In another scenario, you need exactly $33,000 to purchase your vehicle. If your lender charges you a 2% origination fee, you need to apply for $33,680. Through this, you receive the $33,000, but you make payments on the $33,680 loan balance.

How much does it cost to originate a car loan?

Your origination fee depends on various factors, like your lender and credit score. Lenders have different criteria with origination fees; some may set a fee while others may not charge it at all.

Since lenders consider your creditworthiness when assessing your car loan, your credit score also affects how they calculate your origination fee.

Borrowers with high credit scores usually receive lower origination fees. Say your credit score is above 800 – lenders may give you a very low origination fee. Or in some cases, they may waive it altogether. But they may offer higher origination fees if you have poor credit.

Is it worth it to pay the origination fee?

Origination fees may cost you hundreds, but they can sometimes be worth it when you look at the big picture.

Consider a car loan with an origination fee but a low annual percentage rate (APR) than your other options. APR considers the total annual cost of your loan, including the interest rate and other finance charges. In other words, a low APR with an origination fee may be worth your attention.

Let’s compare these two $35,000 car loans with a 60-month term from different lenders:

	Lender 1	Lender 2
Interest rate	6%	7%
Origination fee	1%	0%
Total interest	$5,598.88	$6,582.52
APR	6.41%	7%

Lender 1 has a 1% origination fee while Lender 2 doesn’t charge it. But since the APR and the overall interest payments of Lender 1 are considerably lower than Lender 2, it becomes the cheaper option.

With this in mind, paying the 1% origination fee may be worth the cost since you may save around $983.64 in total interest.

Comparing auto loans with origination fees

When shopping for car loans, make sure you compare beyond the interest rates and origination fees to find the best car loan for you.

Annual percentage rate: The APR shows the overall annual cost of your car loan. So, finding a car loan with a lower APR means your monthly payments and total interest are cheaper.
Monthly payments: Other than your APR, factor in how much your monthly payments are. Doing so helps estimate your monthly dues so that you find the one you can afford.
Fees and charges: Car loans also come with additional fees, such as registration fees and taxes. These costs add up to your overall loan, so make sure you compare how they affect your loan amount and monthly payments.
Loan term: Also, your loan term impacts the overall cost of your loan. Longer terms have lower monthly payments, but you pay higher interest in total. On the other hand, shorter terms mean higher monthly payments but lower overall interest.

How to minimize car loan origination fees?

To avoid overpaying on your loan, you can try some things to minimize your origination fees.

Compare different lenders and offers
One way to save on paying origination fees is to shop around. Scan offers from banks, credit unions, and online lenders. After that, pick the ones that have low APRs or exclude origination fees.Then, you can use a car loan calculator to compare them and see which one saves you the most. Through this, you potentially reduce your overall loan costs.
Negotiate with your lender
If you have a good credit score, it also pays to talk with your lender. Negotiating with them may lower your origination fee or even waive it if you satisfy their requirements.

Other costs of getting an auto loan

Beyond your principal loan and rates, check how other fees affect how much you pay in total.

Registration fees

One of the fees you need to take into account is the car’s registration fee. Remember, this fee varies on several aspects, including your state and vehicle.

Taxes

You also need to pay sales tax when purchasing a car. Since these taxes are non-negotiable, make sure you factor in how much this adds to your expenses.

Car insurance

Your lender will also likely require you to pay for car insurance to cover the costs in case of damages. Usually, full coverage may cost you around $2,000 per year. But the overall price can vary depending on your lender’s requirements.

Prepayment penalties

While not that common, some auto loans come with prepayment penalties when you pay off your car earlier. So, make sure you check your loan agreement for this penalty before you sign any contract.

Bottom line

Paying origination fees may be worth it depending on your situation. So, understanding loan origination fees helps you grasp how it impacts your auto loan and compare different offers. This way, you can confidently find the one that works best for you.

Frequently asked questions

Why am I being charged a loan origination fee?

When processing your loan, lenders charge origination fees. This fee takes into account your application process, including the assessment through the loan funding.

How do I avoid loan origination fees?

Not all lenders charge origination fees, so a way to avoid it is to look for lenders that don’t charge them. For example, you may consider some banks and credit unions that don’t charge origination fees on auto loans.

Can origination fee be waived?

Depending on your lender, they may potentially waive origination fees especially if you have an excellent credit score and payment history.

Is origination fee negotiable?

Typically, lender origination fees are negotiable. So, you may negotiate to either reduce or waive this fee. To improve your chances of negotiating your origination fee, it helps to have a good credit standing.

Who usually pays the origination fee?

Along with other loan costs, you, the borrower, pay the origination fee when you apply for a car loan. This may cost you around 1% to 2% of your loan amount.

Is an origination fee a one-time fee?

A car loan origination fee is usually a one-time upfront fee that lenders charge on your loan application. But in other cases, lenders may also add this fee to your total loan. Check with your lender whether this fee is deducted from your loan proceeds or added to your loan balance.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.