You know the exact car you want to purchase, have talked price with the dealer, and are now looking at the financing options. Interest rates aren’t the only thing to pay close attention to in deciding what loan to take. Origination fees are another item to scrutinize and discuss before signing the car purchase papers.
What Are Origination Fees?
Origination fees refer to expenses lenders charge up front for providing a loan. It is essentially the lender’s commission for processing your application. Origination fees are another way that lenders earn money from your loan besides interest. Their rational is that processing a loan application takes a considerable amount of paperwork, investigation and number crunching. Car loan origination fees can also be called acquisition fees or, in a lease, inception fees, but they are all the same thing.
Do They Vary?
When buying a car, origination fees are quoted as a flat fee or a percentage of the total loan. For auto loans, origination fees are calculated as a percentage of the total loan, usually between 1 and 2 percent of the loan amount. If a lender takes a 2-percent fee for originating a loan, for example, the lenders will make $600 on a $30,000 loan. For leases, the leasing origination fee is a flat fee. The fees are generally between $450 and $700. Some dealers integrate the fee into the lease agreement to make it less obvious.
Are They Negotiable?
Basically “paperwork fees,” origination fees make sense for a home mortgage where there is considerable effort and paperwork involved in setting up a loan, but car loans can be approved, and even pre-approved, in minutes. It seems a lot to pay an extra $500 or more for that effort. The best advice is to shop around for the best auto loan or lease, and try to negotiate. Try credit unions and local banks, which might offer a better deal than the car dealer is offering. Having pre-approval from them before going to the dealer gives buyers leverage, and gives dealers who want the finance business incentive to negotiate. Some dealers will also absorb the fee on leases. It never hurts to try and negotiate; it won’t add to your costs and could reduce them.
Focus on Total Cost
Origination fees are not the only fees and service changes that may be included in a car loan. What matters in the long run is the total cost to you, the borrower. The Truth in Lending Act requires lenders to disclose the interest information on loan agreements, but a true comparison of loans includes all the monthly payments, fees and charges, as well as the interest. A loan with a low interest rate and high fees could actually be more expensive than one with higher interest and no additional fees.
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