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