What Is a Loan Application Fee?
A loan application fee is a fee charged to a potential borrower for processing an application for a loan. Loan application fees can be required for all types of loans and are intended to pay for the costs of the process of loan approval.
How a Loan Application Fee Works
A loan application fee is one type of fee borrowers may be charged for obtaining a loan. Different from other types of loan fees, the loan application fee is an up-front, usually nonrefundable, charge that borrowers are required to pay when they submit a loan application. Loan application fees will vary by lender, and many lenders will not charge a loan application fee at all.
[Important: A loan application fee is an up-front, usually nonrefundable, charge for submitting an application; comparing fees can save you hundreds and you may even avoid one.]
How Do Lenders Use Loan Application Fees?
Online lenders generally require the lowest application fee, thanks to automated processing that does not require some of the added expenses associated with traditional and in-person loan consultations. Loan application fees are typically most common in a mortgage loan, which includes many ad hoc fees in addition to the monthly interest. Working with a mortgage broker can increase the likelihood of a loan application fee because the broker works as an intermediary on behalf of both the borrower and lender.
Because most loan application fees are nonrefundable, they present a high risk for low-credit-quality borrowers. Therefore, borrowers should first do due diligence on their own credit score and the standard approval requirements for the type of loan they wish to obtain in order to ensure that the application fee will not be lost with a credit application rejection.
Borrowers should also seek to compare application fees across lenders. Loan application fees can vary significantly among different types of lenders, ranging on a mortgage loan anywhere from $0 to $500. Thus, researching loan options and application fees with various competitors can potentially result in hundreds of dollars saved. Some lenders may also be willing to waive the application fee through negotiation or comparison to other competitor market fees.
Types of Loan Fees
Loan application fees are just one type of fee lenders can charge on a loan. Other fees may include an origination fee and monthly service fees. In general, fees help a lender cover costs associated with underwriting and processing a loan.
In the credit market, mortgage loans tend to have the broadest fee requirements. Mortgage lenders may charge origination fees, appraisal fees and administration fees. In some cases a mortgage lender may bundle its fees by charging a closing points fee, which is a comprehensive fee calculated as a percentage of the principal balance.