Finance Charge
Finance charge is simply what customers pay lending institutions for the privilege of borrowing their money. As we all know, banks and other lending institutions are in business to make money, and they make profits by lending money to customers. Finance charges can come in different forms. When a bank lends money to a customer, the bank has the legal right to charge interest to the customer based upon the current federal prime-lending rate.
Some rates can be fixed. Others are adjustable. An example of a fixed rate can be seen, for instance, when the original is $1000, and it has a fixed interest rate of 10%, the eventual cost would end up being the amount of the loan plus a $100 finance, which comes out to be $1100. Besides fixed and adjustable rates, some rates are based on compound interest that will make the annual rate come out more than the rate on the first month. The longer the plan, the more interest rate you will have to pay the bank. For instance, you take out a loan of $300,000 and plan to pay it off in 30 years. You’ll end up paying the bank way more than just $300,000 at the end of the 30 years due to interest.
There are other forms of finance charge aside from interest. Bank and credit card companies often charge late fees to customers who fail to make monthly payments on time. The late fee policy for each company must be in writing under a federal Truth-in-Leading Act. If the entire balance is paid before the due date, no finance charge or late fee should apply. But if balances are left of their accounts, the bank or credit card company can legally add a percentage of that balance to the total amount owed.
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