What is a Finance Charge?
If you’re borrowing money, be it often or from time to time, you might already know the term finance charge. These charges appear when you want to borrow money, and they are fees you have to pay on top of the amount you must give back to the lender. It’s very important to learn what is a finance charge, but also how you can avoid these and what kind of regulations are there regarding such charges. Most of the time, lenders will choose to go for percentage-based finance charges because these tend to be the most fruitful for them.
Understanding finance charges
Finance charges are fees that appear when you receive money on credit from any lender. These finance charges will differ based on the loan, but in general, there will always be fees related to any loan. For a mortgage, you might have fees related to loan preparation and processing. For a payday loan, those can be fees related to processing and rapidity, among many others. It’s possible to have multiple finance charges as a credit card owner, too.
Interest charges are seen as finance charges as well. But while some finance charges are addressed in the form of a percentage, others appear in the form of a flat fee. These include late fees, account maintenance fees, but also annual fees for credit cards. The same thing is valid in the case of transaction fees, although these can sometimes be percentage based as well.
Generally, a lender will use finance charges as a form of compensation since they are offering you access to their funds. That’s why, as a customer, you need to study the market before acquiring any loan. You want to understand what finance charges come with it, and whether you are ok with those. On top of that, loans might also have specific terms you must abide by. That’s why you should never rush towards any loan until you have a good insight into the finance charges and terms associated with it.
Regulation
As expected, finance charges are always subject to the government regulations. The Truth in Lending Act forces lenders to show all loan info. Not only that, but any penalty fees and interest rates or standard fees should always be presented to the consumer. That way, they will be able to make an informed decision.
There’s also the Credit Card Accountability Responsibility and Disclosure Act from 2009. According to it, a grace period of at least 21 days needs to be offered to customers before any interest charges are assessed on new purchases.
Interest rates
One of the most common types of finance charges comes in the form of interest rates. As mentioned earlier, interest rates are the main way for lenders to make a profit. These interest rates are presented in the form of a percentage. Every lender can set their own interest rate, and they will present it to the customer, who agrees to it upon signing a contract.
Interest rates also vary based on the borrowing history of the client, not to mention the type of financing and other similar factors. Backing the purchase by an asset can be very helpful, because it will usually lower the interest rate. Unsecured financing tends to carry a higher interest rate since it’s much riskier for the lender.
Annual fees
A very common type of finance charge comes in the form of annual fees. Credit card processing companies tend to be the ones that initiate this type of charge. They are valid in the case of all clients with a credit card. However, if you have a bad credit score, these charges can be much higher when compared to someone with a good score.
Can you avoid annual fees? Normally, it’s not possible to circumvent this and avoid paying annual fees. There are situations where some companies waive the fee in the first year. After that, though, the fees will re-appear as a regular charge, Some credit card companies also provide retention offers, which in some cases will remove the annual fee. Generally, you can’t stay away from an annual fee, so make sure you know the contract terms before signing up for a service like this which also has a dedicated fee.
Balance transfer fees
These balance transfer fees appear when you move debt from one lender to another one, and these fees can go up to 5%. The way you avoid such a fee is not to transfer the balance. In some cases, it can help to pay a transfer fee instead of dealing with double-digit interest rates.
Cash advance fees
If you request a cash advance, you can get one from the lender, but it comes with its own finance charge. Despite the fact that it’s a short term loan, you do have to pay either 5% of the loan amount or a fixed charge. It depends on the lender, so you want to check their terms. A lot of the time, cash advances also come with additional requirements from the lender, and it’s very important to check them beforehand just to be safe.
Foreign transaction fees
When you make a purchase abroad, one of the finance charges you encounter is a foreign transaction fee. Usually, these fees appear because you will need to convert from your currency to the local currency or the other way around. How much are these transaction fees? They will vary, but for the most part, they are 3% of the purchase amount. Sometimes, they can be more, so it’s important to talk with the merchant or check what foreign transaction fees they might have, if any.
Late payment fees
When we talk about finance charges, we also have to cover late payment fees. These finance charges usually appear if you don’t repay a loan/debt before its due date. The best way to avoid late payment fees or interest is to pay them on time. Or, if you are already late, as quickly as possible. Because these fees add up, and the more time passes and you don’t pay, the worse it gets.
There’s also a penalty APR, which is another finance charge. In this case, lenders or card issuers have the option to impose penalty APR whenever they see fit. It can be imposed either after a single late payment if the lender decides that’s the option they want to go for. If you want to avoid penalty APR, then the best thing to do is to pay the credit card bill or loan on time.
Conclusion
If you’re getting money in the form of a loan, you will most likely have to deal with different finance charges. The best thing you can do in order to avoid any finance charge issues is to pay off your balance on time. That’s when you have the lowest possible fees, and it becomes much easier to prevent any issues. It’s also ok to make extra payments on the principal loan amount.
Make sure that you understand the lender’s terms and requirements, and see what finance charge applies to your situation. You can also compare various fees and charges between lenders, as that will help you narrow down the best solution to fit your needs!
