Glossary
Origination fee
A fee charged for making the loan, usually a percentage of the amount borrowed and usually deducted from the proceeds — so you receive less than you borrowed while repaying the full amount.
Origination fee: A fee charged for making the loan, usually a percentage of the amount borrowed and usually deducted from the proceeds — so you receive less than you borrowed while repaying the full amount.
Why it matters
Deduction from proceeds is the part that catches people. Borrow $100,000 with a 3% origination fee and $97,000 reaches your account, while interest accrues on $100,000 and you repay $100,000 of principal.
That raises your effective cost above the quoted rate, and the shorter the loan, the bigger the effect — on a one-year loan a 3% fee is close to 3 points of additional annual cost; across ten years it is much less.
Make sure you borrow enough
If you need $100,000 in the account, borrowing $100,000 with fees deducted leaves you short. Size the loan so the net proceeds cover the need, and check the figure in the closing statement rather than the term sheet.
The other fees to total up
- Guaranty fee on SBA loans, which the lender may pass to you and which is usually financed into the loan.
- Packaging fees, where a third party prepared the application. On SBA loans, fees paid to agents must be disclosed on SBA Form 159 — ask to see it.
- Appraisal, environmental, title and legal on secured and property loans. Real money, often several thousand dollars, and frequently payable whether or not the loan closes.
- UCC filing fees, small but real.
- Servicing or maintenance fees, charged annually on some facilities.
What to ask before you sign
- What is every fee, in dollars, and which are deducted from proceeds?
- What amount actually lands in my account?
- Which fees are payable if the loan does not close?
- Are any fees being paid to a third party on my behalf?