1. What is Finance Charge?

The finance charge is the cost of borrowing money, typically calculated as simple interest on the outstanding balance. It represents the dollar amount you pay for the privilege of borrowing funds.

2. How Does the Calculator Work?

The calculator uses the simple finance charge formula:

Where:

• \( Balance \) — The amount of money borrowed (in USD)
• \( Rate \) — The periodic interest rate (as a decimal)
• \( Time \) — The number of periods the money is borrowed for

Explanation: This formula calculates simple interest, where the charge is based only on the original principal amount.

3. Importance of Finance Charge Calculation

Details: Understanding finance charges helps borrowers compare loan options, budget for repayment costs, and make informed financial decisions about credit products.

4. Using the Calculator

Tips: Enter the loan balance in USD, the periodic interest rate as a decimal (e.g., 0.05 for 5%), and the number of periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound finance charges?
A: Simple charges are calculated only on the principal, while compound charges include interest on previously accumulated interest.

Q2: How do I convert APR to a periodic rate?
A: Divide the annual percentage rate (APR) by the number of periods in a year (e.g., 12 for monthly).

Q3: Does this work for credit cards?
A: Most credit cards use daily compounding, so this simple formula provides only an estimate for them.

Q4: What's a typical finance charge rate?
A: Rates vary widely by loan type and creditworthiness, from 3-5% for mortgages to 15-30% for credit cards.

Q5: Can finance charges be avoided?
A: Some loans have grace periods where no charges accrue if paid in full by the due date.