Finance charge is an additional amount which the lender charges on your car loan. It is one of the common terms used in the financial world. In this article, I will try to tell you what a finance charge is and how to calculate it.
What is finance charge?
It is an additional amount which the lender charges on your car loan. It is charged as a percentage of the total amount of the loan.
Calculating finance charge
Finance charge is calculated in two ways:
1. Fixed rate
2. Adjustable rate
Let’s see how to calculate finance charge using both these methods.
Fixed Rate
In this method, the finance charge is fixed at the time of signing the agreement. If you have a fixed rate car loan then you need to pay a certain amount of money every month for the whole duration of the loan.
The finance charge is calculated by taking the total amount of the loan and adding a percentage of it. For example, if your total amount is $25,000 and you are paying 10% of the total amount as the finance charge then you will be paying $2,500 as finance charge.
How to calculate finance charge using fixed rate method?
Calculate the principal amount
Principal amount is the total amount that you will pay in the loan.
In this case, we are talking about a loan of $25,
So, the principal amount is $25,
Calculate the interest rate
Interest rate is the amount of money that you will be paying per month on the loan.
In this case, we are talking about a loan of $25,
So, the interest rate is 5%.
Calculate the finance charge
Finance charge is calculated by multiplying the interest rate with the principal amount.
In this case, we are talking about a loan of $25,
So, the finance charge is $1,
Adjustable Rate
In this method, the interest rate changes according to the market conditions and your financial condition. The lender can increase or decrease the interest rate as per their need and convenience.
How to calculate finance charge using adjustable rate method?
Calculate the principal amount
Principal amount is the total amount that you will pay in the loan.
In this case, we are talking about a loan of $25,
So, the principal amount is $25,
Calculate the interest rate
Interest rate is the amount of money that you will be paying per month on the loan.
In this case, we are talking about a loan of $25,
So, the interest rate is 5%.
Calculate the finance charge
Finance charge is calculated by multiplying the interest rate with the principal amount.
In this case, we are talking about a loan of $25,
So, the finance charge is $1,
Conclusion:
I hope this post about how to calculate finance charge helped you to understand finance charges and how to calculate it. If you have any doubts or queries then do let me know in the comment section.