What is a Finance Charge?

A finance charge refers to the cost of borrowing or an interest charged on an existing credit. Finance charge is a financial term used in the United States law to describe the total cost of a credit or interest charged on credit extended. The total cost of credit includes interests, commissions, cost of holding a debt and other costs related to the transaction. When used as the cost of debt or credit, it refers to the flat amount including interest charges and other fees that a borrower pays on a debt. Finance charge is also the fee charged in cases whereby borrowers request for the extension of existing credit.

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How Does a Finance Charge Work?

In the United States laws, lenders make profit on the money they offer as credit using finance charges. This means that lenders are compensated for the money they offer as loans through these charges. Finance charges are however regulated by usury laws in the U.S, this states the limit of charge that a lender can request from the borrower. All loans and commoditized credit services attract finance charges, although, their interest rates differ. Although, finance charges are regulated by usury laws, no definites formula for determining interest rates exists. Interest rates generally depend on the type loans and the credit history of the borrower. The Federal Truth in Lending Act however requires that lenders disclose all fees and rates to borrowers.