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How to Calculate Finance Charges

A Finance charge generally refers to the cost of borrowing. It will not only incorporate the principal amount, but will also include all related costs such as maintenance fee and late charges. It is not entirely necessary to compute your own finance charge as most lenders and banks will do it for you.

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Basic calculation

The basic calculation for a loan includes two important elements – Principal and interest. Principal refers to the money being borrowed from the lender for various purposes such as buying a car, house or service etc. Interest on the other hand will refer to the amount made by the lender on the money or service he

or she has given out. To keep our discussion simple, we will be using a flat rate, with no variable changes.

It will be calculated by taking into account the principal amount, rate and time. For instance if the principal amount of buying a car is $1,000 and the rate is 10%, with the payment being made in 2 years, then the amount paid in interest over the 2 years will be:

The total amount which needs to be paid back will be the principal amount plus the interest amount which will be equal to $1000+200= $1200

If you will be making for instance weekly payments over two years, your amount will be 1200/ 104= $11.53 per week.

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