What Is Auto Loan Origination?

All auto loan borrowers have to go through the origination process when applying for a loan.
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Auto loan origination refers to the process of applying for a loan, including processing, reviewing, underwriting and lender approval or denial. Once a loan has been originated, a borrower knows if they're approved and can receive the funds or if they're denied. 

All auto loan borrowers must go through the loan origination process to be approved. But the process's details may vary depending on the lender, as every lender has its standards for approving a loan. Some lenders also charge loan origination fees for processing new loans, which vary by lender.

Here's what to know about auto loan origination.  

Understanding loan origination

Auto loan origination refers to the process of obtaining an auto loan.

Note that the term "loan origination" also refers to the process of applying for other types of loans, including personal loans, mortgages, credit cards and others. And while the origination process for auto loans is similar to that of other consumer loans, there are slight differences.

"The main difference is an auto loan is considered secured by the collateral which is the lien on the vehicle," says Caleb Cook, vice president of consumer lending at Digital Federal Credit Union. "You will be required to provide information about the vehicle, typically a purchase and sales agreement when you are buying a car or the VIN number and other information about the vehicle like the mileage if you are refinancing."

How does auto loan origination work?

The process of auto loan origination typically begins with preapproval, which comes with a hard credit check or pre-qualification, which comes with a soft credit check. Both provide you with an estimated loan amount and an interest rate you may qualify for — although a preapproval will be closer to the actual loan terms because it takes more factors into account.

Once loan eligibility is determined, a borrower must complete an application and provide certain documentation to begin applying for a car loan, including their identification, proof of income, bank statements, access to their credit history and more. 

After a borrower has submitted all the necessary paperwork, the borrower's information will be reviewed using either an automatic underwriting system or manually reviewed by an underwriter. This will determine if the borrower is approved or denied for the loan. 

If a borrower has been approved and accepts their auto loan terms, they can move forward with the loan — that next step is called auto loan servicing.

What is an auto loan origination fee?

Some auto lenders charge an auto loan origination fee, a one-time fee that covers the cost of processing a new loan. This fee is typically paid when your loan is approved — it's either added to your total balance or taken out of your loan amount.

While they vary by lender, origination fees are typically anywhere between 1 to 2% of the total loan amount. So, for example, if you're borrowing $30,000, a 2% origination fee will add $600 to your total loan costs. 

Although some lenders have a set origination fee for all applicants, others use the applicant's credit score to determine the amount they're charged. Typically, borrowers with lower scores are charged higher fees. 

Not all lenders charge origination fees. And because origination fees differ by lender, it's important to compare lenders and loan options to see what you can afford and how such fees will affect the overall cost of your loan

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