What is a Finance Charge?
Finance charge refers to the fee charged by your credit card issuer for the delay you made in payment of the balance amount. In other words, it is the fee charged for the borrowings. It applies to all the borrowings that you have not paid even after the grace period.
For the lenders, it acts as a means of earning profit. The most common things on which finance charge is applied is car loans, mortgage and credit cards. Well, lenders can take different percentage of fee as financial charge. Moreover, it also depends upon the creditworthiness of the borrower.
In addition to this, there are many countries that have limit the maximum finance charge on the type of credit they borrowed. Basically, it is the compensation that the lender gets for providing the credit facility. This can be in the form of interest payments or one time fees whose payment to be made on daily or monthly basis.
Formula of Finance Charge
| Payment = | Interest rate due on each payment x amount borrowed
1 – (1 + Interest rate due on each payment) – Number of payments |
Example of Finance Charge
Suppose you have applied for a car loan of Rs. 5,00,000 for 5 years at an annual rate of 10%.
Number of payments = 5×12 = 60
Interest rates = 10% / 100 = 0.10
Interest on each payment = 0.10 /12 = 0.008
Payment = (0.008 × 5,00,000)/ 1 – (1+0.008)∧-60
