Loan origination fees: how they affect borrowing costs
Learn how a loan origination fee is calculated, whether it is financed and how it changes the total cost of borrowing.
An origination fee is a one-time charge that some lenders collect when issuing a loan. A figure such as 2% may look small, but on a large balance it can meaningfully raise both total cost and Mexico’s CAT disclosure.
How to calculate the fee
When the fee is a percentage of the loan:
origination fee = loan amount x fee percentageFor a $50,000 loan with a 2% fee:
50000 x 0.02 = 1000The fee is $1,000. A lender may instead charge a fixed amount or combine charges, so confirm the basis in the offer.
Effect on total cost
At 24% a year for 24 months, the base payment on $50,000 is approximately $2,643.55, and the scheduled payments total $63,445.32. If the $1,000 fee is paid upfront:
63445.32 + 1000 = 64445.32The scheduled monthly payment has not changed, but the loan has become more expensive. Because you pay an additional charge—or receive less net cash—the effective cost and CAT can rise.
Paid upfront vs. financed
- An upfront fee is paid separately or deducted from the proceeds.
- A financed fee is added to the balance and may itself generate interest.
If the disclosed opening balance exceeds the cash you receive, ask whether fees have been financed. The loan calculator treats the origination fee as a separate initial cost; adjust the financed amount when your contract handles it differently.
Compare fairly
Run the loan once without the fee and again with it. Compare the official CAT, cash received, total repayment and any insurance. A lower rate with a fee is not automatically better or worse than a higher rate without one.
Read CAT vs. interest rate and how to compare two loans before deciding.
Frequently asked questions
Is an origination fee charged only once?
Usually, but its timing and treatment depend on the contract.
Is it included in CAT?
It may be included under the applicable methodology. Use the institution’s official CAT disclosure.
How can I tell whether the fee is financed?
Compare the amount disbursed with the opening balance and review the loan disclosure, contract and amortization schedule.