Finance charge is actually the fee which is added to the total loan amount. Periodic finance charge can help bank and financial institutions earn money which can be further utilized for a planned business expansion. Even though these charges can fluctuate, a certain minimum amount is taken from the loan seekers irrespective of the kind of loan availed by him.

What is a Finance Charge?

Finance charge levied on customers is a means for lenders to earn attractive returns over a long period of time. Every month, the customer has to pay a certain interest for the loan within a few days from the starting of the month. The financial institutions or credit card companies also reserve the right of charging extra amounts in case the customer makes late payments. The charge demanded by the banks from their customers changes depending on the condition of the economy. In case there is pressure from increased inflation, then the charge may be raised as a measure to deal with the situation. Also the finance charge charged by government controlled banks and private banks would be different. Generally, it has been observed that private banks will ask for more interest.

Now, talking about credit cards, the credit card providers impose a minimum charge on the balance amount which is not cleared by the customer. This can be explained with the help of a simple example. Suppose you own a credit card and have kept an unpaid balance of one dollar on the card. Then, your lender would have the official authority to charge you an amount which would be the minimum finance charge of around half a dollar. Finally, what we conclude is that if the balance amount on your credit card is too meager, then you should immediately pay it off instead of paying your lender the minimum finance charge. This charge is also applicable in the case of extension of the credit amount availed.

The charges for the secured loans will be lesser and more attractive for customers than those for unsecured loans. The application of periodic interest rate to the balance of your account can give the finance charges. The calculation of periodic interest rate can be done by taking a ratio of the annual percentage rate and the number of billing periods. The charge can be different for different people such as businessmen or those applying for a personal finance. This is because business loans are generally sanctioned at high rates of interests as compared to other loans. The interest amount charged by private money lenders is always higher than that charged by banks.

Adjusted balance method is widely used by financial institutions to calculate finance charge. In this method, the new charges are added to the balance from your previous statement. Now, from this amount, the amount of money which you pay is subtracted and the remaining amount is multiplied with the interest rate number. In the previous balance method, your credit card provider will simply multiply the balance of your previous statement with the interest rate. Naturally, such methods are more profitable to the card issuers than the customers. At this point, it is very essential for all credit card customers to understand that the rules and regulations related to finance charge can vary from one service provider to another.