Finance Charges

Finance Charges
A finance charge is any charge related to a loan.

What does Finance Charge mean?

A finance charge is a general term that applies to any charge that a lender applies to a loan. It might include interest, transaction fees, account maintenance fees, or late fees, among other charges. The term “finance charge” can apply to the sum of all the fees and interest, or to the individual fees themselves.

In essence, finance charges are the money that lenders make on a loan. Borrowers are likely to find the term on credit card bills, mortgages, car loan statements, or any other documentation related to a loan.

How are Finance Charges calculated?

Finances charges are assessed by the lender and vary from customer to customer. Also, some loans might include a particular type of fee—like a maintenance fee—while others might not.

With interest rates, lenders will use a borrower’s credit score and credit history to determine the finance charges on a loan. For finance charges on a credit card balance, the amount of the charge for a monthly statement will usually be the outstanding balance multiplied by the monthly interest rate.1

How to avoid Finance Charges

To avoid finance charges, consumers should comparison shop when considering a loan and carefully read the terms and conditions. Some loans might come with fewer fees and a low interest rate, while finance charges on other loans might be every expensive.

Also, having a better credit score can lead to lower, more manageable finance charges. Making payments when they’re due improves a borrower’s credit. By paying on time borrowers will see their credit score slowly rise, and will then be able to enjoy the benefits of more affordable rates on future loans.

Finance charges can be dangerous for borrowers, and while there are regulations in place to monitor them, they aren’t strict enough to prevent predatory lending like payday loans. This is why it’s critical for borrowers to know all the terms and charges involved in any loan they are considering.

References

  1. Irby, LaToya. (2016, November 8). How to avoid credit card finance charges. Retrieved from https://www.thebalance.com/how-to-avoid-credit-card-finance-charges-960241