When people borrow money, they are required to pay finance charges. This article will walk you through everything you need to know about finance charges.
So, what is a finance charge? A finance charge is the amount of money that is added to the money that consumers borrow. In the case of credit cards, a finance charge will only be added if the consumer fails to pay more than the minimum amount at the end of the month.
By leaving a balance at that point, the credit card issuer adds the finance charges. Some transactions require consumers to pay finance charges even though they pay their bills by the due date. One example of this is the cash advance.
An Example of a Finance Charge
The consumer has a credit card and charges $500 for the month. This consumer is able to pay $250 by the due date, and this leaves behind a $250 balance. The consumer decides not to add any more charges to this account, so the credit card issuer multiplies the $250 balance by the number of days in the billing cycle and the APR.
There are 25 days in the billing cycle, and the APR is 18%. The credit card issuer multiplies 25 by 0.18 by 250, and $1,125 is the result. The issuer divides $1,125 by 365 and comes up with $3.08. This is the finance charge for the next month.
How Do You Avoid Finance Charges?
As the professionals at SoFi state, “the best way to completely avoid paying a finance charge is to pay your credit card in full by the due date”. Sometimes, people have large balances that they are paying by the month, but if they pay these balances off, they can return to a finance-free existence.
Consumers can reduce their debts on credit cards with high interest rates by transferring their balances to credit cards that offer a 0% introductory APR. These introductory rates don’t last forever, so it is a good idea for consumers to do this if they can pay their balances in full within the introductory period.
Finance Charges on Car Loans
The finance charges for a car loan are the taxes, fees, total interest and other payments associated with the purchase of a vehicle that accrue over the life of the loan. Finance charges can be calculated by multiplying the monthly payment by the number of months that are left on loan and then subtracting the amount from the principal.
In this example, the principal amount was equal to $35,000, and the consumer paid $679 for 48 months. To calculate the finance charges, the consumer must multiply $679 by 48. This is equal to $32,592. Next, subtract this number from $35,000, and this is equal to $2,408. Therefore, the finance charge is $2,408.
Unfortunately, consumers cannot get out of paying finance charges for their car loans, but it is a good idea to know how finance charges are calculated so that they can be prepared to pay this expense as time goes by.
When finance charges can be avoided, it is best to try to do so. If not, the best thing is to make sure that the consumer borrows money with the lowest interest rates possible.