What is the finance charge?
A finance charge is a fee which is charged for the use of credit card or the extension of existing credit or the money we have borrowed.
It may be a flat fee or a percentage of the money you have borrowed. The percentage-based finance charges are the most common type of finance charge.
The finance charge includes not only interest but other charges like financial transaction charge, the cost of carrying the debt itself, any other related transaction fees, account maintenance fees or late fees charged by the lender.
If we talk about personal finance, the personal finance charge is the amount which is paid to borrow money from lenders.
The most common example of a finance charge is: interest rates
How financial charges benefit lenders?
Financial charges provide big benefits to the lenders who lend their money to the borrowers. They make a profit by using their money.
Finance charges for commodity-based credit services like car loans, mortgages and credit cards are called ranges and depend on the creditworthiness of the person who wants to borrow. There are some regulations in every country to control the maximum finance charge and make it in a limit. It controls the charges on a given type of credit, but most of the cases, lenders follow predatory lending practices, where finance charges can amount to 25% or more annually.
A financial charge is a form of compensation paid to the lender for providing the funds, or extending credit, to a borrower. These financial charges can include one-time fees, such as an origination fee on a loan, or interest payments, which can be charged on a monthly or daily basis.
Finance charges can vary from product to product or lender to lender.
There is not a formula to determine the interest rate to charge. A customer can find two similar products from two different lenders with two different set of finance charges.
Finance Charges and Interest Rates
One of the more common finance charges is the interest rate. This is used by a lender to make a profit. It can be expressed as a percentage according to the current amount that has been given to the borrower. Interest rates can also vary depending on the type of financing acquired and the borrower’s creditworthiness. Generally, secured financing, which is based on an asset like a home or vehicle, often carries lower interest rates than unsecured financings, such as a credit card. This is because of the lower risk associated with a loan back by an asset like a home or vehicle.