A finance charge represents the cost borne by a borrower to gain access to credit, comprising of interest and additional fees related to a loan. This charge includes costs incurred for use or extension of credit, usually in the form of transaction fees or interest. Commonly, these fees are set as a percentage of the amount borrowed, offering a profit margin for lenders, while simultaneously urging borrowers to stay informed about possible regulations and cost fluctuations.
Finance charges are composed of the cost for bearing the debt, related transaction fees, and any account servicing fees or late charges set by the lender. These fees are important income sources for lenders, derived from loaning their money. Standard credit services like car loans, mortgages and credit cards have known ranges of finance charges that are largely determined by the borrower's creditworthiness. However, some regulations restrict the maximum finance charge on a credit type, although, some of these restrictions still allow for high-rates of over 25% annually from predatory lending.
Finance charges act as compensation for the lender for extending credit to the borrower, which can include one-time fees for loan origination or interest payments accommodating monthly or daily compoundings. The rate and type of these charges can vary among different products or lenders.
There isn't a standard formula for determining what interest rates to charge. It's possible for a customer to qualify for similar products from two distinct lenders, yet have different finance charges.
The most common type of finance charges is the interest rate, which is the percentage profit the lender makes based on the current amount given to the borrower. The interest rates can fluctuate depending on the kind of financing and the borrower's creditworthiness, typically, secured loans backed by assets like a home or vehicle have lower rates than unsecured credit.
Credit card finance charges are expressed in the card's base currency, including cards used globally, allowing borrowers to transact in foreign currencies.
Governments regulate finance charges. In the US, the federal Truth in Lending Act demands full disclosure of all interest rates, standard and penalty fees. Furthermore, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 necessitated a minimum 21-day leeway before new purchases can incur interest charges.