Definition of financial charges

What is a financial charge?

Finance charges are fees charged for using a loan or extending an existing loan. This can be a fixed fee or a percentage of borrowings, with percentage-based finance charges being the most common. Finance charges are often an overall cost, including the cost of carrying the debt as well as transaction fees, account maintenance fees, or late fees charged by the lender.

Understanding financial charges

Finance charges allow lenders to make a profit on the use of their money. Finance charges for commoditized credit services, such as auto loans, mortgages, and credit cards, have known ranges and depend on the creditworthiness of the person looking to borrow. Regulations exist in many countries that limit the maximum finance charges assessed on a given type of credit, but many of the limits still allow for abusive lending practices, where finance charges can be 25% or more per year.

Finance charges are a form of compensation paid to the lender for providing the funds or extending credit to a borrower. These fees can include one-time charges, such as origination fees on a loan, or interest payments, which can be amortized on a monthly or daily basis. Finance charges may vary from product to product or from lender to lender.

There is no single formula for determining the interest rate to charge. A customer may be eligible for two similar products from two different lenders with two different sets of finance charges.

Financial charges and interest rates

One of the most common financial charges is the interest rate. This allows the lender to make a profit, expressed as a percentage, based on the current amount that has been provided to the borrower. Interest rates may vary depending on the type of financing acquired and the creditworthiness of the borrower. Secured finance, which is most often backed by an asset like a house or vehicle, often carries lower interest rates than unsecured finance, like a credit card. This is most often due to the lower risk associated with an asset backed loan.

For credit cards, all finance charges are expressed in the currency the card is based on, including those that can be used internationally, allowing the borrower to make a transaction in a foreign currency .

Financial charges and regulations

Financial charges are subject to government regulation. Federal Lending Truth Act requires that all interest rates, standard fees, and penalty charges be disclosed to the consumer.In addition, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 required a grace period of at least 21 days before interest charges could be assessed on new purchases.