What Is Total Finance Charge?
A finance charge is the total amount of money a consumer pays for borrowing money. This can include credit on a car loan, a credit card, or a mortgage. Common finance charges include interest rates, origination fees, service fees, late fees, and so on. The total finance charge is typically associated with credit cards and consists of the unpaid balance and other fees that apply when you carry a balance on your credit card past the due date.
Key Takeaways
- A finance charge is the cost of borrowing money and applies to various forms of credit, such as car loans, mortgages, and credit cards.
- Common examples of finance charges include interest rates and late fees.
- A total finance charge is typically associated with credit cards and represents all fees and purchases on a credit card statement.
- A total finance charge may be calculated in slightly different ways depending on the credit card company.
How Total Finance Charge Works
At the end of each billing cycle on your credit card, if you do not pay the statement balance in full from the previous billing cycle's statement, you will be charged interest on the unpaid balance, as well as any late fees if they were incurred. Your finance charge on a credit card is based on your interest rate for the types of transactions you’re carrying a balance on. These include purchases, balance transfers, and cash advances, each of which might have a different interest rate, and therefore a different amount you owe in each of those categories. Your total finance charge gets added to all the purchases you make—and the grand total, plus any fees, is your monthly credit card bill.
Credit card companies calculate finance charges in different ways that many consumers may find confusing. A common method is the average daily balance method, which is calculated as (average daily balance × annual percentage rate × number of days in the billing cycle) ÷ 365.
To calculate your average daily balance, you need to look at your credit card statement and see what your balance was at the end of each day. (If your credit card statement doesn’t show what your balance was at the end of each day, you’ll have to calculate those amounts as well.) Add these numbers, then divide by the number of days in your billing cycle.
The hardest thing to figure out is what your average daily balance was during the billing cycle.
Example of Total Finance Charge
Wondering how to calculate a finance charge? To provide an oversimplified example, suppose your daily balances were as follows in a five-day billing cycle, and all your transactions are purchases:
Day 1: $1,000
Day 2: $1,050
Day 3: $1,100
Day 4: $1,125
Day 5: $1,200
Total: $5,475
Divide this total by 5 to get your average daily balance of $1,095.
The next step in calculating your total finance charge is to check your credit card statement for your interest rate on purchases. Let’s say your purchase APR is 19.99%, which we’ll round to 20% (or 0.20) for simplicity’s sake. Now you have all the inputs you need to do the calculation.
($1,095 × 0.20 × 5) ÷ 365 = $3 = Total finance charge
Your total finance charge to borrow an average of $1,095 for 5 days is $3. That doesn’t sound so bad, but if you carried a similar balance for the entire year, you’d pay about $219 in interest (20% of $1,095). That’s a high cost to borrow a small amount of money.
On your credit card statement, the total finance charge may be listed as “interest charge” or “finance charge.” The average daily balance is just one of the calculation methods used. There are others, such as the adjusted balance, the daily balance, the double billing balance, the ending balance, and the previous balance. You can avoid paying high finance charges if you know what method is used and pay your credit card bill in a way that minimizes or eliminates these charges.
FAQs
Common examples of finance charges include interest rates and late fees. A total finance charge is typically associated with credit cards and represents all fees and purchases on a credit card statement. A total finance charge may be calculated in slightly different ways depending on the credit card company.
What is a finance charge example? ›
These types of finance charges include things such as annual fees for credit cards, account maintenance fees, late fees charged for making loan or credit card payments past the due date, and account transaction fees.
What is the total finance charge? ›
A finance charge is the total amount of interest and loan charges you would pay over the entire life of the mortgage loan. This assumes that you keep the loan through the full term until it matures (when the last payment needs to be paid) and includes all pre-paid loan charges. Loan charges include: Origination charges.
What is the total finance charge for a $4250 loan at 13.25% interest compounded monthly for 24 months? ›
The total finance charge for a $4,250 loan at 13.25% interest compounded monthly for 24 months is c) $611.20. Therefore, the answer is c. $611.20.
What is an example of finance amount? ›
The amount financed is shown on page 5 of your Closing Disclosure under "Loan Calculations." For example, if you have a $100,000 loan, but the lender is charging you $4,000 in certain types of fees in order to get the loan, the “amount financed” would be $96,000.
What is a simple finance charge? ›
Simple Interest Financing (SIF) is a common method of calculating finance charges, based on the agreed terms (amount financed, number of payments, interest rate/APR, due date, etc.) of a finance contract. Payments are allocated between accrued finance charges (interest) and principal.
How do I calculate a finance charge? ›
Credit card companies calculate finance charges in different ways that many consumers may find confusing. A common method is the average daily balance method, which is calculated as (average daily balance × annual percentage rate × number of days in the billing cycle) ÷ 365.
How do you calculate total financing cost? ›
When we pay off a loan using monthly payments, we pay more than the loan was originally worth because of interest. To calculate how much the loan costs in total, we multiply the monthly payment and the number of payments made.
Why do I have a finance charge? ›
Finance charges are a form of compensation to the lender for providing the funds, or extending credit, to a borrower. These charges can include one-time fees, such as an origination fee on a loan, or interest payments, which can amortize on a monthly or daily basis.
What does total cost of financing mean? ›
Financing cost (FC), also known as the cost of finances (COF), is the cost, interest, and other charges involved in the borrowing of money to build or purchase assets. This can range from the cost it takes to finance a mortgage on a house, to finance a car loan through a bank, or to finance a student loan.
The finance charge on an $8,000 loan with a monthly payment of $162.80 for 60 months is $1768.
What is the finance charge for a $4000 two year loan with an 8.5% APR? ›
Find the finance charge for a $4,000, two-year loan with an 8.5% APR? SOLUTION Use the total amount of monthly payments from Example 2 and subtract the borrowed amount. 4,364.16 − 4,000 = 364.16 The finance charge for this loan is $364.16.
How do I calculate my monthly loan payment? ›
The formula is: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1], where M is the monthly payment, P is the loan amount, i is the interest rate (divided by 12) and n is the number of monthly payments. To calculate monthly mortgage payments, you must know the loan amount, loan term, loan type and your credit score.
What are total finance charges? ›
A finance charge is the total dollar amount you pay to use a particular credit. Therefore, we may phrase the finance charge definition as the amount paid beyond the borrowed amount. It includes not only the interest accrued on your account but also takes into account all fees connected to your credit.
How to calculate amount financed? ›
The amount financed is the loan amount applied for, minus the prepaid charges. The amount financed may be lower than the amount you applied for because it represents a net figure: it's equal to your loan amount minus any prepaid fees.
What type of expense is a finance charge? ›
A finance charge is a fee charged for the use of credit or the extension of existing credit. It may be a flat fee or a percentage of borrowings, with percentage-based finance charges being the most common.
Why do I have a finance charge on my credit card? ›
With credit cards, your finance charge is the interest that has accrued on the money you owe during that particular billing cycle, plus any penalties, annual fees, transactions fees, and other fees.
What is a finance charge on a bill? ›
The most common type of finance charge is credit card interest, which is a percentage of what the amount you owe if you haven't repaid the minimum or the entire credit card bill. Finance charge will be charged on the ending balance amount on a daily basis from the transaction dat. Annual fee is usually fixed charge.
What is a finance charge also known as? ›
The most common formula is based on the average daily balance, in which daily outstanding balances are added together and then divided by the number of days in the month. In financial accounting, interest is defined as any charge or cost of borrowing money. Interest is a synonym for finance charge.
