Finance charge

Borrower's total cost of credit, including loan interest, commitment fees, and prepaid interest, in a consumer loan. Under the Truth in Lending Act, the finance charge must be disclosed as the total dollar cost of credit. Contrast with Annual Percentage Rate , which states the cost of credit as an annualized rate.

The finance charge does not include late payment fees, annual charges, such as a credit card annual fee, and credit insurance, except in situations where the lender requires insurance before a loan is made.

Interest or certain other fees charged to a Credit customer.
Example: A customer makes purchases of $400 on credit. Payment is made one month later. Based on an annual percentage rate of

.18

interest of 18%, a finance charge of $6.00 (-- x $400) is added to the

12

bill.

The amount owed to a lender by a purchaser-debtor to be allowed to pay for goods purchased over a series of installments, as opposed to one lump sum at the time of the sale or billing.

A finance charge, sometimes called the cost of credit, is expressed as an annual interest rate levied upon the purchase price. It does not include any amounts that the lender might require for insurance premiums, delinquency charges, attorney's fees, court costs, collection expenses, or official fees that might be incurred should the debtor default in the repayment of the debt.

Federal and state "truth-in-lending" laws mandate that the complete cost of finance charges be fully disclosed on credit agreements and billing statements.

See: Consumer Credit Protection Act.

In United States law, a finance charge is any fee representing the cost of credit, or the cost of borrowing. It is interest accrued on, and fees charged for, some forms of credit.^[1] It includes not only interest but other charges as well, such as financial transaction fees. Details regarding the federal definition of finance charge are found in the Truth-in-Lending Act and Regulation Z, promulgated by the Federal Reserve Board.

In personal finance, finance charge may be considered simply the dollar amount paid to borrow money, while interest is a percentage amount paid such as annual percentage rate or APR).^[2] This definition of finance charge and interest seems to be very narrow and not consistent with the websters definition or the accounting definition.

In financial accounting, interest is defined as any charge or cost of borrowing money. Interest is a synonym for finance charge. In effect, the accountant looks at the entire cost of settlement on a Housing and Urban Development (HUD) form 1 (the HUD-1 Settlement Statement) document as interest unless that charge can be identified as an escrow amount or an amount that is charged to current expenses or expenditures other than interest, such as payment of current or prorated real estate taxes.^[3]

References

1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 513. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
2. ^ Kapoor, Jack R.; Les R. Dlabay, Robert J. Hughes. Focus on Personal Finance. Mcgraw-Hill/Irwin Series in Finance, Insurance and Real Estate (2nd edition ed.). Mcgraw-Hill. ISBN 0073530638. 
3. ^ Giovetti, Al (2008). Accredited Business Accountant Review Course. Accreditation Council on Accounting and Taxation. 

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