- Financial Term Glossary
- Finance Charge
Finance Charge
Finance charge summary:
A finance charge is the total cost to borrow money or get and use credit from a lender or creditor.
Some examples of finance charges are interest, loan origination fees, underwriting fees, and appraisal fees.
You can’t always avoid finance charges when you borrow, but knowing how to spot and evaluate them could help you minimize your borrowing costs.
Finance charge definition and meaning
Finance charges are costs you pay a lender or creditor when you borrow money, or when you get and use credit. Some finance charges are a flat fee, while others are charged as a percentage based on the amount of money borrowed. Interest is an example of a finance charge you would typically pay on a loan or credit card.
Key concept: A finance charge is the total cost to borrow.
Finance charge: a comprehensive breakdown
Finance charges are costs that you pay when you borrow money. Lenders and creditors make money from these finance charges. Finance charges apply to most kinds of debts, including auto loans, personal loans, mortgages, and credit cards.
Finance charge amounts
If you're unsure what or how much in finance charges you're paying, you can find this information on your monthly loan or credit card statement. Interest is one of the most common types of finance charges. Other costs, like loan origination fees, closing costs, and transaction fees, are also considered finance charges.
Opting out of finance charges
Finance charges aren't optional. You’ll have to agree to the lender’s finance charges when you open the account. Some fees, like cash advance fees or credit card interest, can be avoided. Paying your entire credit card statement balance and always paying your bill on time are ways to help avoid added costs.
Reducing finance charges
Many times, you have some control over your finance charges. For example, you could lower the total interest you pay on a loan by making extra payments toward the principal balance. Interest is typically charged based on how much you owe. If you owe less, you’ll pay less.
Understanding finance charges
Finance charges are standard and should be expected. It’s wise to research finance charges so you can make an informed borrowing decision.
When you have a clear picture of the finance charges associated with a particular loan or credit card, it’s easier to:
Compare borrowing options
Choose the most cost-effective option
Minimize the costs associated with borrowing money
Make debt repayment decisions that reduce your costs
Outline a realistic budget that considers all costs that you must pay
Real-life examples of finance charges
Here are some examples of finance charges that you may pay as a borrower:
Interest charges
Transaction fees
Loan origination fees
Underwriting fees
Finance Charge FAQs
Do I have to pay the finance charge on a loan?
Yes, you must pay finance charges. These charges are the cost of borrowing money, and you’ll agree to pay them when you sign your loan agreement. Before you take out a new loan, it’s a great idea to review loan options and compare finance charges to understand how the loan will impact your wallet.
How can I avoid finance charges?
If you get a loan, you could minimize or reduce the interest you pay by making extra payments toward your principal balance.
With most credit cards and lines of credit, you’ll only pay interest on the amount you borrow. So if you borrow less, you’ll pay less. The lender can tell you if the loan or line of credit you’re looking at works this way.
What happens if you pay off a loan early?
Paying off a loan early could save you money on interest fees, reduce your debt faster, and lower your debt-to-income ratio. Some lenders charge prepayment penalties, meaning you could be charged a fee for paying your loan off early. Achieve doesn’t charge prepayment penalties.
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