Why Does A Lender Charge An Arrangement Fee?
If you are applying for certain types of borrowing, the bank, building society or other lender will often charge an arrangement fee and may charge other fees as well. So, why does a lender make you pay an arrangement fee as well as charge you interest on the amount you borrow?
Well, the arrangement fee is usually payable to cover the cost of the lender having to process your request for finance. That could be for agreeing to provide the likes of an overdraft facility, commercial mortgage, bridging loan, development finance, business loan or a residential mortgage.
The lender is involved in a great deal of work and needs to cover its costs. It separates these costs from interest costs.
For instance, the lender will need to assess your application for let’s say a commercial mortgage. Not only will the business manager and his or her assistant that are employed by the lender need to examine the application form but they will need to study all the other paperwork that you have submitted. This could comprise, for instance, a business plan, three years audited accounts, up to date management accounts, projected accounts covering the next twelve months, cash flow forecast and twelve months bank statements. All the documents may need to be referred by the business manager to “head office” for them to examine.
Having agreed the application for finance, the lender will need to write to you to confirm their decision that may also involve the preparation of a loan agreement form that requires your signature. The lender will need to set up the loan and transfer the monies into your business current account and set up a monthly repayment program.
To do all these things will involve a considerable amount staff time and that costs money. That is why an arrangement fee is usually charged. There may well be other fees payable to the lender such as application, legal and valuation fees.