How to Figure out Finance Charges

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If you want to find out the finance charges that you’re going to settle, it is important that you learn the basics. With enough knowledge, you can be sure that you’re charged with the right amount.

You can also request the lender to provide you with the details of the charges.

When you have credit cards or you apply for loans, you should be interested on how finance charges are calculated. Reputed credit card companies will not deny you of the info you need if you simply request for it but it would really help if you know how to do it yourself. That way, you can compare the figures and clarify things if you think that the charges are too high.

Common Methods

Knowing the basic calculations will give you an idea. However, not all lenders use the same method. Most of the time, lenders make use of complicated methods. In a loan or credit card use, there are always two factors – principal and interest. The principal refers to the borrowed amount. On the part of the lender, they will want to make profit and that is possible by charging interest. Now, the interest can be fixed or it can be variable, depending on the requirements of the lender.

For simple interest, this formula is used:

Principal x rate x time = Interest

Time refers to the number of years it takes to repay the loan. This simple computation can be useful when calculating finance charges. There is another formula that you can look into:

Ave. Daily Balance x APR (Annual Percentage Rate) x Billing Cycle (No. of days) / 365

Other Methods Used by Lenders

If you try to analyze it, the principal amount is always needed, the term, payments, and APR. Once you have the pieces of info, you can easily calculate the charges. There are various ways to calculate the finance charges and there is a need to look into it:

  • Average daily balance – this is a common method; your balance for every billing period is calculated on a daily basis, and the figures are added before it is divided by the days included in the cycle.
  • Adjusted balance – this is obtained by determining the balance at the start of the cycle and you will deduct all payments you’ve already made. The balance will not cover your current purchases
  • Double billing cycle – the daily balance of the previous and current are derived and for credit card companies, this is illegal follow.
  • Daily balance – this refers to the daily balance that falls within the current cycle and you will multiply it with the rate
  • Previous balance – this figure also refers to the ending balance of the last cycle; this doesn’t include charges or payments
  • Ending balance – the starting balance is taken and the payment or charges will be deducted

Having an idea of these various methods will allow you to keep track of your obligations.  

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