Most of us have heard the term finance charge but very few of us are familiar with what exactly it is and why we have to pay it. If you have always wondered what exactly this means, here is a small description of what exactly a finance charge is and why we have to pay it.
A finance charge is what we get when we charge something to a credit card or take out a loan. Some financial institutions and credit card companies allow a special period where they give you the chance to pay off what you owe in a time period where you do not have to pay a finance charge. If you have not paid off your loan or what you owe, then they usually start to charge you interest and you pay the finance charge. Interest rates vary depending upon what you agree to and what your current credit score is.
An example of this would be if you were to take out a $2000 dollar loan and you have an interest rate of 10% then you would end up paying a finance charge of $200. Many people prefer to try to pay their loan or credit card off early in order to avoid having to pay the extra fee or to try and reduce it.
Why do we have to pay a finance charge? Simply put, the bank and financial institutes have to make money as well. But they also have to be honest about it which is why it is always extremely important to read through all the fine print when you go to apply for a loan or to apply for a new credit card. They have to state how much they plan on charging and how much you will end up paying including the finance charge over a period of time. It is very rare to ever make a larger purchase without ever paying interest so as consumers we should be sure to shop around to ensure we get the best deal.