In
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
law, a finance charge is any
fee
A fee is the price one pays as remuneration for rights or services. Fees usually allow for overhead, wages, costs, and markup. Traditionally, professionals in the United Kingdom (and previously the Republic of Ireland) receive a fee in contra ...
representing the cost of
credit
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
, or the cost of borrowing. It is interest accrued on, and fees charged for, some forms of credit. It includes not only
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...
but other charges as well, such as
financial transaction
A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A ...
fees. Details regarding the
federal
Federal or foederal (archaic) may refer to:
Politics
General
*Federal monarchy, a federation of monarchies
*Federation, or ''Federal state'' (federal system), a type of government characterized by both a central (federal) government and states or ...
definition of finance charge are found in the
Truth-in-Lending Act and
Regulation Z, promulgated by the
Federal Reserve Board
The Board of Governors of the Federal Reserve System, commonly known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the mon ...
.
In personal finance, a 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
The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (EAPR), is the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mort ...
(APR). These definitions are narrower than the typical dictionary definitions or accounting definitions.
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
The United States Department of Housing and Urban Development (HUD) is one of the executive departments of the U.S. federal government. It administers federal housing and urban development laws. It is headed by the Secretary of Housing and Ur ...
(HUD) form 1 (the
HUD-1 Settlement Statement
The HUD-1 Settlement Statement is a standardized mortgage lending form in use in the United States of America on which creditors or their closing agents itemize all charges imposed on buyers and sellers in consumer credit mortgage transactions. The ...
) 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.
See also
*
Interest expense
Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond inve ...
*
Liquidity constraint In economics, a liquidity constraint is a form of imperfection in the capital market which imposes a limit on the amount an individual can borrow, or an alteration in the interest rate they pay. By raising the cost of borrowing or restricting the a ...
References
Banking
Personal finance
Retail financial services
Law of the United States
Financial accounting
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