Financing Fees are the total amount paid by the borrower throughout the life of a mortgage. This includes the processing charges for the mortgage and the interest paid till the last installment.
What Is a Financing Fee?
Finance fee, also known as finance cost, is the amount of money that a borrower pays on top of the installment amount throughout the life of the loan or mortgage or credit. Banks, financial institutions and other lenders communicate the financing fee they will impose on the borrower. This amount is either a flat fee or a specific percentage on the principal amount that the borrower pays off in each installment.
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Although lenders have the right to decide the percentage or the amount of financing fee, each country has set some regulations in place that limits the maximum percentage of financing fee. These charges are usually different in each bank and lender, however, to attract borrowers, the fee is more or less the same.
How Do You Calculate Finance Charge?
As there is no fixed amount or percentage, there isn’t a uniform formula in place to calculate this fee. Depending on the lender, this fee can be a one-time payment or a fixed percentage for the loan period. Let us take an example to understand this better.
Suppose a person avails a personal loan of $2000 for 2 years. On this amount, the lender applies a 2% financing fee for each month on the total principal amount. This means that the borrower has to pay a fixed percentage of $2000 each month. In this case we can calculate the fee as:
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Finance cost = Principal amount + Monthly Finance Fee = 2000 + 40 (2% of 2000) = 2040
Finance cost = 2000 + 24 x 40 = 2040 + 960 = 2960
Here, the borrower will be paying $960 on top of the principal amount throughout the period of the loan. This amount will vary for each borrower. Additionally, businesses and other types of loan have larger principal amounts to repay and the finance cost is more.
What Does Finance Fee Include?
A finance fee includes more charges than the interest rate. It will depend on the type of the loan, the lender and the economic conditions. If there is an economic crisis, the financing fees increase. Additionally, if a borrower is unable to pay a month’s installment amount, there are additional charges on the missed installment. Finance fee includes the following:
- Annual or monthly interest
- Late fee
- Service fee
- Transaction fee
- Loan application fee
- Account set up fee
There can be more such fees that may be included in the loan. It will depend on the lender as to whichever cost he has to bear for lending the money to the borrower. These costs can include anything from accounts set up to late payments.
What Is the Purpose of a Financing Fee?
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The purpose of the financing fee is to create an urgency for the borrower to repay the principal amount within the fixed time period. This way the borrower knows that if he has to pay an additional fee each month/year on the amount he borrowed and if he doesn’t pay back, this amount will keep increasing and it will reflect poorly on his credit score.
It also compensates the lender for any expense or cost he may have incurred during the process of lending the money. Also, it helps the lender to earn a surplus amount of money.
How Can I Avoid Finance Costs?
It is not possible to eliminate the finance cost unless the lender decides to waive off the charges entirely. A borrower can only ensure that he doesn’t incur any additional charges with late payments or defaults on the loan.
Conclusion
A financing fee is a mandatory fee that a borrower must pay in lieu of getting help with money. It secures the lender from incurring additional costs and provides them with a profit. This fee is regulated by the government and both the lender and the borrower are informed ideally about the amount. The regulation secures the borrower from any misdoings and helps the lender to gain a fair amount of surplus.
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Category: Finance
