An establishment fee is a common fee charged by lenders when you apply for a loan. It might also be called an ‘application’ fee or ‘upfront’ fee.
An establishment fee covers the costs of processing your application, including things like administrative costs, credit assessment, loan set-up and document preparation.
Make sure you take the establishment fee into account when calculating the full cost of your loan over its lifetime.
How is it charged?
This fee can be charged in several ways:
A flat fee is a standard amount that doesn’t change, no matter how much you’re borrowing.
A tiered fee is based on the total amount borrowed. For example, it could be $250, $500 or $750, depending on the size of the loan.
A percentage fee is based on the total amount borrowed and your credit profile. For example, it could be 4% of the loan amount.
A hybrid fee is a combination of a flat fee and a percentage fee. For example, $200 + 2% of the loan value.
Your establishment fee is usually added to the amount you wish to borrow, rather than paid up front. This means if you’re borrowing $10,000 with an establishment fee of $300, your total loan amount will be $10,300.
Why is this important?
By adding the establishment fee to the total loan amount, it means you pay interest on a higher amount. For example, if you borrow $30,000 with an establishment fee of 4%, your total loan amount is $31,200. This means you’ll be paying interest on the full $31,200 balance. You’d be surprised at how this adds up over the course of the loan!
Let’s do the maths
When you’re comparing lenders, make sure you check the establishment fee. Some lenders who charge lower interest make up for it with a high establishment fee. This means you could end up paying more overall.
Some lenders don’t charge an establishment fee but it’s important to look at the full picture. They may instead charge higher interest rates or monthly servicing fees.
In Australia, lenders are required to show a comparison rate when they advertise an interest rate. Comparison rates do the hard maths for you by rolling together the interest rate, establishment fee and monthly fee into one percentage figure.
It’s a good idea to check the comparison rate to better understand the loan’s true cost and then compare them to identify the best lender.