Back to: BANKING, LENDING, & CREDIT INDUSTRY
Finance Charge Definition
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.
A Little More on What is a Finance Charge
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.
References for Finance Charges
Research articles for “Finance Charge”
Determining the finance charge under the truth in lending act, Landers, J. M. (1977).
What do investment banks charge to underwrite American Depositary Receipts?, Chen, H. C., Fauver, L., & Yang, P. C. (2009). Journal of Banking & Finance, 33(4), 609-618.
Disclosure of Finance Charges: A Rationale, Jordan, R. L., & Warren, W. D. (1965). Mich. L. Rev., 64, 1285.
Regulation of Finance Charges in Retail Instalment Sales, Warren, W. D. (1958). Yale LJ, 68, 839.
Consumer knowledge of finance charges on credit card purchases, Arora, R. (2015). In Proceedings of the 1987 Academy of Marketing Science (AMS) Annual Conference (pp. 15-18). Springer, Cham.
Truth in Lending-The Right of Rescission, Disclosure of the Finance Charge, and Itemization of the Amount Financed in Closed-End Transactions, Griffith, E. (1997). Truth in Lending-The Right of Rescission, Disclosure of the Finance Charge, and Itemization of the Amount Financed in Closed-End Transactions. Geo. Mason L. Rev., 6, 191.
Who’s in Charge of Global Finance, Barr, M. S. (2013). Who’s in Charge of Global Finance. Geo. J. Int’l L., 45, 971.
Another View on the Origin of Dealer Participation in Automobile Finance Charges, Hardy, R. (1954). Another View on the Origin of Dealer Participation in Automobile Finance Charges. Ind. LJ, 30, 311.
The New Legislative Finance Charges: Disclosure, Freedom of Entry, and Rate Ceilings, Johnson, R. W. (1968). The New Legislative Finance Charges: Disclosure, Freedom of Entry, and Rate Ceilings. LAw & CONTEMP. PRoBs., 33, 671.