What is a Finance Charge?

A finance charge is the total fee incurred by a borrower to access and use debt. The charge compensates the lender for providing funds to a borrower. In essence, it is the cost to borrow money. The total finance charge includes the interest on the debt, the commitment fees by the lender, any account maintenance fees, and late fees. This charge is applied to any borrowed money, unless you pay it back to the lender within a designated grace period.

The amount of finance charges is closely related to the creditworthiness of the borrower. Thus, a stable business with predictable cash flows and a conservative financial structure will incur lower finance charges.

Disclosure of Finance Charges

The government requires that interest rates, penalties, and other fees be disclosed in lending documents issued to borrowers. This requirement is contained within the Truth in Lending Act. This is done in order to minimize the cases in which borrowers are charged excessive rates for loaned funds.