What Is The Finance Charge For Car Loan?

Knowing the Finance charge for a car loan before putting your signature on the dotted lines will help you alot in understanding how much your loan cost and what you can do to reduce it if possible. For those who cannot purchase their cars in cash from their savings, getting financing elsewhere seems to be the best option. However, the financing you’re going for comes at a cost.

If you have already purchased a car through car finance, you may also want to know how much of your payments constitutes the finance charge.

Ordinarily, every borrower will want to go for a loan that is less costly. So for starters, you need to understand that the higher the finance charge the higher the cost of your car loan and vice versa.

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What Is A Finance Charge?

A Finance Charge is basically the cost of a loan or how much a lender charges you for giving you a loan. All loans comes at a cost and that cost is what is termed as the ‘finance charge’.

A finance charge could be a fixed flat fee or a percentage of the amount financed. It includes interest, origination fee, late payment fees, etc, and it is how lenders usually make their profits.

The amount you end up paying as finance charge is subject to certain factors such as the amount being financed, credit worthiness, loan type, lender, etc.

Types of Finance Charges 

Finance charges on your loan may include all or some of the following:

  • Interest rates
  • Origination fees
  • Payoff penalty
  • Late fees
  • APR
  • Cost of closing your loan

What Is Finance Charge For A Car Loan? 

The finance charge on your car loan is the cost that comes with the loan. Fees such as origination fee and interest rate constitutes a finance charge on your car loan.

It is possible to avoid some finance charges such as late fees, whereas others like APR or Interest rate cannot be avoided but reducable.

The type of financing you go in for has an effect on what your finance charge will be. For example, interest rates which forms a huge part of your finance charge will be higher if you have a poor credit. Same way secured car loan will get you lower interest rates due to the presence of collateral.

Basically, a car loan should have all or some of these finance charges:

  • Annual Percentage Rates (APR)
  • interest Rate
  • Origination fee
  • Late payment fees

So you can easily determine what amount you’re paying as finance charge on your car loan by deducting the amount you borrowed from the total ie. the summation of your monthly payments throughout your loan term.

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Understanding The Various Types of Finance Charges On A Car Loan

Check out a brief explanation of the various finance charges that comes with a car loan below:

  • Origination Fee: Origination fee is simply a fee you’re charged by the auto finance company or your lender for processing your car loan application.
  • Interest Rates: is the cost a lender charges you for offering you a loan for a period and is a percentage of the total amount financed.
  •  Annual Percentage Rate (APR): whereas interest rate is the cost of borrowing on let’s say monthly basis, APR on the other hand is the cost of borrowing for a year. It includes other charges such as fees and non interest charges.
  • Late Payment fees: this is a fee you’ll be charged if you make any late payment. Hence you can easily avoid this charge by making sure that you make prompt payments.

READ ALSO: How Does A Car Finance Work?

Bottom line…

As a borrower, you may want your car loan to cost less as possible. So although you cannot run from most of the finance charges for car loan, you can actually do something about them in order to have a relatively less costly loan.

Negotiate for a better interest rate with your lender if possible. The best way to negotiate for the best interest rate is to shop around a few lenders to find out what their rates are. This helps you to compare their rates and put you in a better position to negotiate for the best rate possible.

Additionally, you can reduce the cost of your loan by going for a shorter loan term. It will increase your monthly payments, however, it will save you some money which otherwise would have gone into the payment of interest.

Lastly, you can avoid paying more in interest by making sure you have a good enough credit score before applying for a loan. This is because, the better your credit score, the better your chances of getting a lower interest rate.

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