Finance Charge

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DEFINITION of 'Finance Charge'

A fee charged for the use of credit or the extension of existing credit. May be a flat fee or a percentage of borrowings, with percentage-based finance charges being the most common.

A finance charge is often an aggregated cost, including the cost of the carrying the debt itself along with any related transaction fees, account maintenance fees or late fees charged by the lender.

BREAKING DOWN 'Finance Charge'

Finance charges allow lenders to make a profit on the use of their money. Finance charges for commoditized credit services like car loans, mortgages and credit cards have known ranges and will depend most on the credit-worthiness of the person looking to borrow.

Regulations exist in many countries that limit the maximum finance charge assessed on a given type of credit - but many of the limits still allow for predatory lending practices, where finance charges can amount to 25% or more annually.

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RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
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    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
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    Typical requirements for a consumer to qualify for closed-end credit include satisfactory income level and credit history, ... Read Full Answer >>
  4. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
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