A finance charge is an interest charged to you on a loan, credit card, or line of credit. The finance charge is usually calculated by a monthly percentage rate (APR), which represents the annual rate at which interest is assessed on the principal balance.

The finance charge is itemized separately from the principal amount on your bill or payment statement. The finance charge is usually based on a percentage of the amount borrowed, and usually includes a charge for any late payments or fees.

According to federal law, your finance charge must be disclosed with the terms of your loan, credit card, or line of credit.

## What is a finance charge?

A finance charge is the percentage of interest on your credit account. It’s calculated based on your balance and is compounded daily.

* A finance charge is the percentage of interest on your credit account. It’s calculated based on your balance and is compounded daily.

* Every credit card has a finance charge, but some cards charge more than others. For example, the Citi® Double Cash Card charges 2% per month on purchases, and 1% on cash advances.

* The finance charge on your credit card is based on your balance.

* Your finance charge is calculated at the daily rate.

* The finance charge on your credit card is based on your balance.

* The finance charge on your credit card is calculated at the daily rate.

## How is it calculated?

The finance charge is the cost of borrowing money. When calculating it, the finance charge is a percentage of the loan amount.

**The finance charge is calculated **by multiplying the amount of interest due by 100 and dividing it by the loan amount.

**The finance charge is subtracted** from the total amount due on the loan.

**The finance charge is expressed **as an annual percentage rate (APR), which may also refer to how much you pay in interest over the life of the loan.

## Why finance charges are sometimes necessary for business?

Most business loans require fixed payments of principal and interest. The payment schedule is usually set up to be repaid in 3, 5, 7, or 10 years. Some loans have a balloon payment that is due at the end of the repayment term.

**A balloon payment **is a final payment due on a business loan. The balloon payment covers the remaining balance of the loan. The borrower pays the entire balance of the loan plus interest.

**A refinancing loan** is used to refinance an existing mortgage, business loan, student loan, auto loan, or personal loan. Refinancing a loan involves obtaining a new loan to pay off an existing loan.

**A revolving loan** is a credit facility that the borrower can borrow from and repay over time. A revolving loan is sometimes referred to as a credit card.

**Cash flow** is the amount of money that is readily available to a business for operating purposes. Cash flow funds are used by a business to purchase inventory, pay bills, operate its day-to-day operations, and expand its business operations.

**A line of credit **is a credit line that can be used for a variety of purposes. A line of credit is a type of loan that authorizes a borrower to access funds for a specified period of time.

## How finance charges are used to calculate profits and losses?

When calculating profit or loss, it is important to understand how earnings are derived. This is because these amounts are the basis for determining taxes, dividends, and employee compensation.

**Earnings.** Financial statements list earnings as profit or loss.

**Gross profit **(the amount earned before deducting expenses). Gross profit is shown as “gross” and “profit.”

**Gross profit margin**. This is the gross profit expressed as a percentage of sales.

**Net profit**. Net profit is the difference between net sales and operating expenses.

**Net profit margin.** Net profit margin is the net profit expressed as a percentage of sales.

**Operating expenses**. These expenses are also known as selling, general, and administrative expenses.

**Net sales**. Net sales consist of revenues with fewer discounts, credits, returns, allowances, and adjustments.

**Return on equity**. Return on equity is net income divided by average shareholders’ equity.

**Return on assets. **Return on assets is net income divided by total assets.

**Return on invested capital. **Return on invested capital is net income divided by total stockholders’ equity.

## When finance charges are payable?

When finance charges are payable?

**Amount** – The amount payable on the account at maturity is known as an installment. It is calculated by multiplying the principal amount by the applicable rate of interest and dividing it by 360 (the number of days in a year).

**Period **– The number of days for which interest is payable is known as the interest period. For example, if you borrow Rs. 1,00,000 at 10% p.a. for 3 years, the amount payable at maturity will be Rs. 1,30,000.

**Maturity** – The date on which the amount payable on the account is repayable is called maturity.

**Maturity Amount **– The amount of money payable at maturity is called the maturity amount.

**EMI** – The EMI is calculated by multiplying the principal amount by the applicable rate of interest and dividing it by 360 (the number of days in a year).

**Interest** – Interest is calculated on the outstanding balance on the account at the end of the interest period. For example, if you borrow Rs. 1,00,000 at 10% p.a. for 13 months, the interest payable will be Rs. 3,000.

**Tips for minimizing finance charges in your business
** If you are building a business, you probably already know that the way to increase your profits is to minimize your expenses. But, did you know that you can also increase your profits by minimizing your expenses? When you minimize your expenses, you reduce the amount of money you have to pay in interest charges.

Here are some things you can do to minimize your expenses and reduce your interest payments, too:

**Pay off debt**. If you pay off your credit card debt in full each month, you will save hundreds of dollars every year in interest charges.

**Borrow from family.**If you borrow money from a family member, you can avoid interest payments.

**Invest in a CD**. CDs have extremely low-interest rates.

**Use a business credit card.**

**Shop around.**If you shop around, you may find credit cards with lower interest rates.

**Pay bills on time.**If you pay your bills by the due date, you are reducing your interest payments.

**Conclusion**

Now that you’ve read our finance charge definition, I hope you’re better informed on the topic. If you have a finance charge question or have a finance charge definition to share, I’d love to hear from you in the comments below. Thank you for reading!