A finance charge is any fee associated with borrowing money. You may encounter several different types of finance charges including origination fees, processing fees, application fees and more.
What Is A Finance Charge?
If you’ve ever taken out a loan, you must have encountered a “finance charge” on your bill statement. And if it’s your first time requesting credit, finance charges will play an important role in picking the perfect lender. So what are they and how do they work?
A finance charge is any expense incurred from a loan. The term itself can mean either the sum of all charges or one individual fee. You will find it in most loan or credit-related bills or documents. A common example of a finance charge is the monthly interest fee. Creditors charge interest fees as compensation for lending you money.
However, there are other finance charges. If the borrowers have difficulty paying the minimum payment, they may be billed a late fee. Some companies will charge their customers if they don’t clear outstanding balances within a repayment period. It’s important to read the fine print of your loan terms and conditions.
Be careful as there may be other fees involved. Additional fees can increase the total cost of your loan in the long run. CreditNinja’s experts will inform you of all finance charges before granting the loan, meaning no unpleasant surprises.
How Do Finance Charges Work?
Finance charges differ from one loan to another. They depend on the borrower, the type of loan and the creditor. The borrowers’ credit score and their financial history can affect the interest rate. A good credit rating means the creditor is facing less risk, which is why it’s associated with lower interest charges.
Various loan and credit products define their own terms and conditions associated with the repayment period, credit usage, installments, etc. For example, you may encounter a finance charge for activating overdraft protection. Having a negative balance on your credit card for a long period can incur other fees.
The credit terms aren’t the only cause of expenses, though. Each creditor has their own policy on finance charges. If borrowing money from a relative, chances are you won’t have to pay a cent on top of the principal. But, most financial institutions will have defined finance charges for their services. Likewise, credit card companies might have you pay an annual maintenance fee. With pawn loans, you can often avoid additional expenses by negotiating a good deal. For example, explaining your situation to the pawnbroker will help you avoid the extra charge for being unable to repay your loan on time. However, you can avoid certain finance charges with other loan types too.
How Can I Avoid Paying Additional Finance Charges?
There isn’t a silver bullet to avoiding every finance charge. Each loan has its own terms you must adapt to. But, a universal approach to avoiding most finance charges is maintaining healthy financial habits. By paying installments on time, clearing outstanding balances, keeping your account balance positive, you are less likely to breach loan or credit terms. Doing so will gradually increase your credit score, securing better conditions on your next loan — meaning fewer finance charges and a better interest rate.
To avoid unnecessary fees, read the terms and conditions of your loan. Make sure you understand every detail of the deal before signing. Ask experts for advice if you need to.