Finance Charge

Finance charge summary: 

• Borrowing money usually isn’t free—you will generally pay finance charges. 

• The fees that go into finance charges are either flat costs or calculated based on the amount you borrow. 

• Finance charges include interest, origination fees, and other costs. 

Finance Charge Definition and Meaning 

In most cases, a loan will cost you money beyond just the amount you borrow. Your monthly payments when you repay the loan will include other costs, such as the interest (usually determined by your credit score), account maintenance fees, and other possible charges. Together, these costs are known as the finance charge. 

Simply put, finance charges are the cost of credit. 

Lenders are required by law to disclose the fees that will be tacked onto your loan, whether it’s  a personal loan, mortgage or auto loan. You can use this information to compare loans.

Key Components of Finance Charge

When you borrow money, you’ll make regular (often monthly) payments on your debt to repay the loan. It’s a good idea to know what costs go into the finance charges you’ll pay on top of the sum you borrowed. 

A few fees that could make up finance charges include: 

• Interest. Interest is charged as a percentage of the amount you borrow. 

• Origination fee. Your creditor may charge this as the fee for making your loan.  

• Late fees. If you make a late payment, a late fee is typically tacked onto what you owe for the subsequent month. 

• Early penalty fee. Some lenders may have a fee if you repay the loan early.

• Annual fee. This is a fee for having the account.

• Foreign transaction fee. If you use your credit card outside the U.S., you might pay this fee.

Real-Life Example of Finance Charge

The amount and type of finance charges you’ll pay vary depending on lender and type of loan. Under the Truth in Lending Act, lenders are required to disclose the fees you’ll be charged when you borrow from them. Having access to a breakdown of finance charges makes it easier for you to comparison shop and to understand your bill. You could also learn to protect yourself from predatory lending practices with this information. Predatory lending is bad for you (the borrower).

For example, let’s say you’re considering two credit cards with the same interest rate. One credit card issuer changes an annual fee and the other doesn’t. You could save money by opting for the lender that has a lower finance charge. 

Finance Charges: Other Considerations

Weighing your options for borrowing money could help you avoid paying more than you need to. This is especially true when you’re borrowing a large amount of money, such as with a mortgage. Mortgages in particular often have finance charges that differ from those you might find on a personal loan, auto loan, or credit card. These can include: 

• Loan origination

• Mortgage insurance

• Discount points

• Application fee

• Underwriting fee

• Credit report fee