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Loan Origination: What Is It and How Does It Work?

What Is Loan Origination?
Susan Guillory
Susan GuilloryUpdated February 23, 2023
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If you’re taking out a loan, you’ll go through a process called loan origination. It refers to the numerous steps involved in getting a loan.Origination helps determine the loan rates and terms you’ll be offered, among other things.As a borrower, it’s smart to understand what origination is and how it works. Here’s what you need to know about loan origination, plus what you can do to help make the loan origination process go as smoothly as possible.

What Is a Loan Origination?

Loan origination is the process in which a loan underwriter reviews your documents and determines what loan you may be eligible for, and at what interest rate and terms. Loan origination could take place if and when you apply for a consumer lending product.

Loan Origination Requirements

When you’re getting a personal loan you need to meet a number of specific origination requirements.First, there’s personal loan pre-approval. This is where you provide some basic information, such as your income and date of birth. If you are preapproved, you’ll get estimated offers for loan interest rates and terms. But this does not mean that you are officially approved. Preapproval gives you a sense of the terms and interest rates you might be eligible for.After preapproval, you’ll submit a formal loan application and the underwriter may ask you for more documents, such as your tax returns, pay stubs, or bank statements.If you don’t meet the loan origination requirements with one lender, you can try again with another. There are generally loans for almost every situation. For instance, If you aren’t currently employed or you don’t earn a lot, you may meet requirements for certain no income verification personal loans. And if your credit isn’t good or you don’t have a credit history, you may still qualify for some loans.Here are some of the specific requirements you may need to meet during loan origination.

Proof of Income 

Lenders want to see that you’re making enough money to cover your debts. You should have a low debt-to-income ratio, ideally under 36%, which may help you qualify for the best rates.

Photo ID 

You’ll also need to supply a photo ID, such as a driver’s license or passport, to verify your identity.

Credit History 

Lenders will also look at your credit history to determine how financially responsible you are. If you have a lot of debt, they may decide that the risk is high that you won’t be able to repay the loan. In that case, they might deny you the loan, or offer you a loan with high interest to help offset their risk.

Are There Any Fees Associated With Loan Origination?

Loan origination often does involve a fee. In fact, there is an origination fee you may be charged. The fee, which varies in amount from lender to lender, covers the administrative costs of reviewing your financial documents and processing your loan application.Some lenders charge a flat origination fee. Others charge a percentage of your total loan amount, typically 1% to 5%. The fee is often included as part of your loan amount. So if you apply for a loan of $2,000 and the origination fee is $100, you’ll get $1,900 in loan funds.Not all lenders charge origination fees. But those who don’t may charge a higher interest rate on a loan.

Loan Origination Process 

The process of getting a loan can differ slightly, depending on whether you apply in person at a bank or online. One of the benefits of obtaining a personal loan online is that the origination process tends to go quickly, which means you could get your funds faster. When you get a loan in person, it could take days for your funds to come through.Here are the steps involved in the loan origination process.

Step 1: Get Preapproved

As mentioned previously, applying for personal loans starts with preapproval. This is when you find out the best loan terms you can qualify for. Typically, you fill out some basic information with one or more lenders. The lender will do a soft credit check (which doesn’t affect your credit score), and then they’ll send you the preapproved estimated offers you might be eligible for.

Step 2: Submit Your Application 

Next, you’ll move into the formal application process. The loan underwriter, the person who determines how risky it is to lend to you, will review your loan application.  At this point, you may be deemed conditionally approved for a personal loan, which means that the underwriter has screened your information and things are looking good. A hard credit check will be performed, and the underwriter may ask for additional documents to confirm that the information you provided on your application is correct. These materials may include:
  • Tax returns
  • W-2s
  • Bank statements
  • Social Security number
The more documents you provide, the better the understanding the underwriter will have about your financial situation. If asked for documents, try to provide them as quickly as possible. You can even track your personal loan application status to see where the process stands.Once you’re approved (or not) the lender will notify you.

Step 3: Review Your Options

At this stage, if you’re working with a lender in person —at a bank, for instance — you may need to return to their office to review your loan options. (If you’re applying online, you should be able to complete the process on your computer.) The loan officer will explain the terms of the loan you qualify for, including the APR on the loan, how long you’ll have to pay the loan, and what your monthly payment will be. Be sure to ask such questions as:
  • Are there any additional fees?
  • If I pay off the loan early, will I have to pay a penalty?
  • How soon will the money be deposited into my account?
  • If I have other questions, how can I reach you?

Step 4: Sign the Loan Agreement

If you like the terms of the loan, you’ll be given a loan agreement with the conditions and terms in writing. Sign it and keep a copy of this agreement in a safe place in case you need to refer to it later.

Step 5: Receive Your Funds

Many lenders can deposit the loan funds into your bank account the same day you sign the loan agreement. With others, it might take a few days.

Step 6: Set Up Loan Payments

Now that you have the lump sum you need, it’s time to think about repayment. Make note of the monthly due dates in your loan agreement and stick to them. If your payments are late, it could negatively impact your credit report.It’s wise to set up automatic payment on your loan each month. Schedule the payment to be sent a few days in advance of your monthly due date to avoid penalty late fees.

The Takeaway 

Loan origination is a multistep process of applying for and getting a loan. Supply any documents your lender requests as quickly as possible to help move the process along. And once you get a loan offer, review the terms of the loan carefully and ask any questions you may have to make sure the loan is right for you.Ready to start with the preapproval process? Lantern makes it fast and easy. Just fill out one simple form and you’ll get offers from multiple lenders all at once. Check your rate today with Lantern.

Frequently Asked Questions

What does loan origination mean in lending?
What are the six stages of the loan origination process?
What is an example of a loan originator?
Photo credit: iStock/Ridofranz
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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