Finance charge
Encyclopedia
In United States law, a finance charge is any fee
representing the cost of credit
, or the cost of borrowing. It is interest accrued on, and fees charged for, some forms of credit. It includes not only interest
but other charges as well, such as financial transaction
fees. Details regarding the federal
definition of finance charge are found in the Truth-in-Lending Act and Regulation Z, promulgated by the Federal Reserve Board.
In personal finance, finance charge may be considered simply the dollar amount paid to borrow money, while interest is a percentage amount paid such as annual percentage rate
or APR). This definition of finance charge and interest seems to be very narrow and not consistent with the websters definition or the accounting definition.
Creditors and lenders use different methods to calculate finance charges. The most common formula is based on the average daily balance, in which daily outstanding balances are added together and then divided by the number of days in the month.
In financial accounting, interest is defined as any charge or cost of borrowing money. Interest is a synonym for finance charge. In effect, the accountant looks at the entire cost of settlement on a Housing and Urban Development
(HUD) form 1 (the HUD-1 Settlement Statement
) document as interest unless that charge can be identified as an escrow amount or an amount that is charged to current expenses or expenditures other than interest, such as payment of current or prorated real estate taxes.
Fee
A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...
representing the cost of credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
, or the cost of borrowing. It is interest accrued on, and fees charged for, some forms of credit. It includes not only interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
but other charges as well, such as financial transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
fees. Details regarding the federal
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
definition of finance charge are found in the Truth-in-Lending Act and Regulation Z, promulgated by the Federal Reserve Board.
In personal finance, finance charge may be considered simply the dollar amount paid to borrow money, while interest is a percentage amount paid such as annual percentage rate
Annual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
or APR). This definition of finance charge and interest seems to be very narrow and not consistent with the websters definition or the accounting definition.
Creditors and lenders use different methods to calculate finance charges. The most common formula is based on the average daily balance, in which daily outstanding balances are added together and then divided by the number of days in the month.
In financial accounting, interest is defined as any charge or cost of borrowing money. Interest is a synonym for finance charge. In effect, the accountant looks at the entire cost of settlement on a Housing and Urban Development
United States Department of Housing and Urban Development
The United States Department of Housing and Urban Development, also known as HUD, is a Cabinet department in the Executive branch of the United States federal government...
(HUD) form 1 (the HUD-1 Settlement Statement
Hud-1 settlement statement
The HUD-1 Settlement Statement is a standard form in use in the United States of America which is used to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate....
) document as interest unless that charge can be identified as an escrow amount or an amount that is charged to current expenses or expenditures other than interest, such as payment of current or prorated real estate taxes.