What is an origination fee?

An origination fee is a charge imposed by a lender when a loan is created. This fee is often expressed as a percentage of the total loan amount and is intended to cover the costs associated with processing the loan, including underwriting, processing, and other administrative tasks. By charging this fee, lenders can ensure that they are compensated for the work involved in evaluating and approving a loan application. This is crucial in the lending process as it helps the lender maintain operational efficiency while assessing the risk of lending to the borrower.

Other options reflect different financial concepts: a loan term increasing over time pertains to adjustable-rate loans; a penalty for late repayment relates to consequences for borrowers who fail to meet their payment deadlines; and a fee for setting up business accounts indicates initial costs associated with establishing business banking relationships. However, these do not define the concept of an origination fee, which is specifically linked to the initial cost incurred upon taking out a loan.