A finance charge is a cost associated with using a credit or extending an already existing credit. Finance costs may be based on a fixed rate or a percentage of borrowings; the latter is more typical. The cost of carrying the debt as well as any associated transaction fees, account management fees, or late fees assessed by the lender are frequently included in a finance charge.
Lenders are able to benefit from the utilization of their funds thanks to financing charges. Finance fees for commoditized credit services, such as credit cards, mortgages, and auto loans, have established ranges and are based on the borrower’s creditworthiness. Many nations have laws limiting the highest financing charge that can be applied to a particular type of loan, yet many of these laws still permit predatory lending practices, where finance charges can reach 25% or higher yearly.