Legal Definitions - finance charge

A finance charge is an additional cost that a consumer pays for the privilege of purchasing goods or services over time, rather than paying the full amount upfront. It represents the total cost of borrowing money or extending credit, and it is most commonly seen in the form of interest.

Here are some examples to illustrate the concept of a finance charge:

• Credit Card Purchase: Imagine you buy a new smart television for $800 using your credit card. If you pay the entire $800 balance by the due date on your statement, you typically won't incur a finance charge. However, if you only pay a portion of the balance, say $200, and carry the remaining $600 balance over to the next billing cycle, your credit card company will charge interest on that outstanding amount. This interest, calculated based on your card's Annual Percentage Rate (APR), is the finance charge for the convenience of not paying for the television in full immediately.

• Furniture Store Installment Plan: A family decides to purchase a new dining room set priced at $3,000 from a furniture store. Instead of paying cash, they opt for the store's 36-month installment plan. The store charges an interest rate of 18% per year. Over the three-year period, the family will pay the original $3,000 for the furniture plus an additional amount in interest. This total additional amount paid beyond the $3,000 cash price of the dining set is the finance charge, representing the cost of spreading their payments over three years.

• Auto Loan: When an individual buys a car, they often take out an auto loan from a bank or dealership. Let's say a used car costs $20,000. The buyer secures a five-year loan at an interest rate of 6%. Over the course of the loan, they will make monthly payments that cover both a portion of the original $20,000 (the principal) and the interest accrued. The total amount of interest paid over the entire five-year loan term, which is the extra money paid beyond the car's $20,000 purchase price, is the finance charge for financing the vehicle.