How to Minimize the Total Finance Charge
You may have heard about the Total Finance Charge, but do you know what it is? This charge is a percentage fee or a flat fee for certain services. Examples include account maintenance and transaction fees. Fortunately, there are several ways to reduce the total amount of finance charges you are responsible for paying. Banks and other financial institutions are in business to make a profit, and one of their main ways to do this is through finance charges. This fee is assessed against any type of financing you obtain, whether that’s a credit card, a loan, or a mortgage.
The amount of the Total Finance Charge varies from lender to lender, but the amount you pay is usually a percentage of the outstanding balance. If you borrow $1,095 and pay it off in five days, your finance charge will be $3. However, if you carry the balance of the loan for one year, it would cost you $219 in interest. That’s about 20% of the $1,095 balance. Depending on your lender’s rules, you may want to check your total finance charge before you print a statement.
In determining the Total Finance Charge, lenders must account for all charges made to the customer. Each charge should be clearly labeled as a finance charge, as mischaracterization can lead to errors. For example, a loan origination fee might be called a “processing fee” instead of a finance charge, but it’s still a finance charge. So, the total Finance Charge should include all fees associated with a loan.
In order to minimize the Total Finance Charge, you should pay off the account. A finance charge is assessed on a loan or credit account if the balance is more than a certain amount or if there is no grace period. Oftentimes, finance charges are assessed in error, so it is crucial to review your statement carefully and avoid any unexpected surprises. In many cases, it’s worth paying off your account as soon as possible to reduce the Total Finance Charge.
The APR and money factor are typically not mentioned on the car leasing agreement, but it does state the total finance charge. Total finance charge is also called the total rental charge, and is made up of the finance charge portion of monthly payments. If you know the APR and money factor, you can compute the Total Finance Charge using the calculator on the left. Once you have these numbers, you can calculate the APR and money factor for yourself. And as long as you make timely payments, you should be able to make the payments you need.
When using an automated loan disclosure system, make sure to capture finance charges and factor them into the computation and disclosure. The system should be consistent and repeatable to prevent errors. You should review the system on a periodic basis and change the data if it isn’t working as it should. The automated system should also be reviewed periodically to make sure it is capturing the total finance charge. And remember, there are exceptions to this rule.