Understanding Finance Charges
Updated: Sep 3, 2020
You know what they say: there's no such thing as a free lunch.
Mortgage companies, auto lenders, credit card companies and other lenders are more than happy to help you borrow money, but they don't work for free. Enter: the finance charge.
What is a finance charge?
Simply put, the finance charge is the cost of the credit in a dollar amount. This is the total amount of interest and fees you will pay over the life of the loan (assuming that all payments are made on time).
What types of charges are included in the finance charge?
Though finance charge fees vary by loan type and transaction, a general rule of thumb is that any fee or amount that you are required to pay in order to obtain the credit is considered part of the finance charge. Generally, if you would not have to pay the fee in a comparable cash transaction, the fee is a finance charge fee and must be included in the finance charge calculation.
This is particularly important to keep in mind if you are dealing with a lender who tells you that you must buy certain insurances or warranties in order to purchase a car, for example.
Why is the finance charge important?
The finance charge is an important point of reference that allows consumers to easily compare loan products. Comparing finance charges allows you to see how much the credit will cost you, and whether someone else might be able to provide it to you for less.
The finance charge is also a required disclosure under the Federal Truth In Lending Act ("TILA"). The law requires lenders to clearly and accurately disclose this, and other, information about your loan on a Truth In Lending Disclosure. The appearance of the disclosure may vary depending on the type of transaction, but generally the disclosure must list the items included in the finance charge, as well as the interest rate, the APR, the amount financed, and the total of payments.