Finance Charge

Meaning and Definition

A finance charge refers to the cost of borrowing or obtaining credit from a lender. It includes the interest charged on the loan or finance agreement, as well as any additional fees or charges associated with the financing. The finance charge represents the total cost of credit extended to the borrower and is typically expressed as a percentage of the loan amount.

Why it is important to know

Understanding the finance charge is important as it helps borrowers evaluate the total cost of the car finance arrangement. By considering the finance charge, individuals can assess the affordability of the loan, compare different financing options, and make informed decisions based on the total cost of credit.

Example in car finance

Suppose you are financing a car with a loan amount of £20,000 and the lender charges an interest rate of 5% per annum. In addition to the interest, the lender also charges an administration fee of £150. The finance charge in this case would be the total interest paid over the loan term plus the administration fee. By considering the finance charge, you can understand the true cost of the car finance and evaluate its affordability.