Let us find out What is Finance Charge?. The cost of lending money, including the interest and other fees, is termed a finance charge. It could be a percentage of the loan amount or a flat cost levied by the business.
A finance charge gets added to the amount you borrowed from the lender until you pay the whole amount back during the grace period. Sometimes even if you pay the amount before the due date, you may need to pay a financing fee in some cases, like in credit cards.
Finance charges differ based on what loan or credit you have taken and from where you have taken it. The finance charges for bank loans are different from finance charges on a Car Loan.
There is a process or formula, whatever you call it, through which you can calculate your Finance Charges on any loan you have taken. You can also use an online finance calculator to estimate your finance charges.
Finance charges are included in the mortgage loans also. When you have a car, then you’ll likely have to pay interest, discount points, insurance, and other expenses. Finance charges also get added on top of all these expenses.
Why do you have to pay finance charges?
The main motto behind finance charges is that it provides the lenders with a profit source because they’re the one who’s providing you the loan. Finance charges can also be said as compensation. Finance charges differ a lot based on that loan you’re availing or have availed.
What are the finance charges for credit cards?
The finance charge on a credit card is the interest charge for credit accounts s. It is directly tied to the annual percentage rate (APR) and is calculated based on the cardholder’s balance.
There are various ways in which your finance charges on credit cards can be calculated, and it depends on the credit card company and what method they choose. But there’s a way you can figure that on your own.
To get the daily rate of finance charges, what you can do is – you can divide the Annual Percentage Rate, that is, the APR, by 365.
Now, if you want to calculate the interest rate of the finance charge, you can do that by multiplying the number of days in your billing cycle statement to the daily finance rate that you just calculated.
For example, you have to charge $4000 to a credit card in the month. You have to pay $1500 by the due date but can’t pay the entire amount. When the due date expires, your balance on the card is $2500. If you don’t use your card again in the following month, and you don’t make any payments, your typical daily balance is $2500, and you’ll have to pay an interest charge on balance.
The next time the billing cycle ends, the company’s credit card company will multiply the $2500 by the APR and the days of the cycle. If you’ve got 25 days in a cycle with an APR of 18 percent, then the company multiplies 2500 by 25 and 0.18 to come up with $1,1250. It then divides that by 365 to arrive at $30.82. The $30.82 is the charge for finance on the following statement.
Actual finance charges on your credit card dues can go very according to the method adopted by your credit card company.
How to find Finance charges on a Credit Card bill?
The finances charges are stated in many areas on the monthly credit card bill statement. On the first page of the credit card billing statement, a summary of the account is given, where the details of your balance payments, credits, purchases, and any interest charges.
There will be a financing charge line item and the date that got imposed on your account. All the payments done on your account throughout the billing cycle will also be stated on that bill.
There’ll be a separate section that breaks down the interest charges, so you need to check out that too. You’ll be able to find it specified where finance cost is charged.
Finance Charges on a Car loan
The most common and usual way to finance an automobile purchase is to take a car loan, and this is what most people do to purchase a car. Especially if a car is too expensive to pay in cash for, the buyer is most likely to take a car loan. The Finance charges are part of that high price of the car, and one can’t deny to pay it.
Finance charges that are required to be paid are; interest charges, application fees, documentation charges, and other expenses come under Finance Charges.
If you make an extra payment on the principal of your loan amount with each monthly payment, then you can save most of the finance charges on your mortgage or car loan.
How do lenders figure out how much to finance they charge for a loan?
This criterion varies for every different loan. The interest charged on the due amount from the amount borrowed then the finance charges may depend on the borrower’s creditworthiness.
And your creditworthiness gets determined based on all the loans you’ve taken in the past and how much time you repaid the loan. Due to this, the lender can determine how likely are you to repay the loan and would you repay it on time or not.
For not letting the finance charges exceed too much, many countries have some restrictions to the finance charges. But there’s is something called predatory lending in which the lender lends the money for an excessive fee which may get over 25 percent, and the restrictions can do nothing about these.
Paying off a Finance Charge
Personal finance is an important subject to master, but so many people struggle with it. There are a lot of ways to make it more manageable, though. One of the most basic is learning how to pay off a finance charge.
If you are paying only the minimum amount on your credit card bill each month and carrying a balance, you are racking up finance charges that hurt your bottom line.
Such minimum credit card payment, covers the finance charges along with a small portion of the debt. And if you’re making a small/minimum payment, then it’s possible that your debt amount will not decrease significantly.
Because you’re loan amount hasn’t reduced much, so you’ll get charged the interest again, and this will become sort of a never-ending cycle. A solution to this is to increase the payment amount you pay every month.
If you’re in lots of debt, in that case, this strategy to increase the minimum payment might not be enough to manage the financing charges every month. You need to find way to pay outstanding balance as much as you can.
● A financing charge is a fee charged to the person taking any loan.
● Interest charges, loan processing fee, documentation fee, application fee, or any cost that gets charged on top of the loan amount borrowed are examples of a Finance charge.
● Finance charges may vary based on what loan you’ve taken, and it also depends on the market condition and prime rates.