Origination fee
An origination fee is what a lender charges to set up a new loan, usually quoted as a percentage of the amount borrowed and then paid in cash, deducted from the money advanced, or added to the balance.
The fee pays for putting the loan together: pulling the credit file, verifying income, preparing documents and funding the advance. It is normally quoted in percentage points of the loan amount, so it scales with the size of the borrowing rather than with the work involved. On a mortgage it sits among the other closing costs; on a personal loan it is often the only upfront charge there is.
Where the fee is taken changes what it costs. Paid in cash at closing, it never enters the loan and no interest is charged on it. Deducted from the advance, the borrower receives less than the face amount and repays the full amount, so the true cost of the money is above the quoted rate. Rolled into the balance, the borrower repays the fee and pays interest on it for the life of the loan. In every case it is a real cost, which is why it is one of the charges folded into the APR a lender discloses in the United States. Comparing two offers on the note rate alone hides it completely.
Two errors are common. The first is treating the fee as fixed: lenders often price fee and rate against each other, so the same lender may quote a lower fee with a higher rate, or the reverse, and the pair has to be judged together. The second is ignoring how long the loan will be held. An upfront fee spread across a long term is a small addition to the yearly cost, and the identical fee on a loan cleared in a year or two is a large one. It is also why refinancing has to earn back its own fees before it saves a thing.