Finance charges allow lenders to make a profit on the use of their money. Finance charges for commoditized credit services such as car loans, mortgages, and credit cards have known ranges and depend on the creditworthiness of the person looking to borrow. Regulations exist in many countries that limit the maximum finance charge assessed on a given type of credit, but many of the limits still allow for predatory lending practices, where finance charges can amount to 25% or more annually.
Finance Charges and Interest Rates
One of the more common finance charges is the interest rate. This allows the lender to make a profit, expressed as a percentage, based on the current amount that has been provided to the borrower. Interest rates can vary depending on the type of financing acquired and the borrower’s creditworthiness. Secured financing, which is most often backed by an asset such as a home or vehicle, often carries lower interest rates than unsecured financing, such as a credit card. This is most often due to the lower risk associated with a loan back by an asset.
For credit cards, all finance charges are expressed in the currency from which the card is based, including those that can be used internationally, allowing the borrower to complete a transaction in a foreign currency.