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Finance Charges
A finance charge is the cost of using credit. It can include interest and fees. It is wise to check with your lending institutions about what their finance charges are before agreeing to go into debt with them.
There are two purchases that most people have to go into debt to make. Those are a home and an automobile.
We are going to look at the effect higher (or lower) finance charges have on your loan payments.
Example #1
You have found your dream car. The cost is $41,500. You have a trade-in that the dealership has valued at $11,000 so you still have to come up with $30,500. You will be financing for 5 years and will be charged 4% sales tax.
- Use the car loan calculator to find the information below.
| Bank | Interest Rate | Monthy Payment | Total Cost of Finance Charges |
|---|---|---|---|
| A | 4.64% | ? | ? |
| B | 3.89% | ? | ? |
| C | 4.15% | ? | ? |
Answer:
| Bank | Interest Rate | Monthy Payment | Total Cost of Finance Charges |
|---|---|---|---|
| A | 4.64% | $593.38 | $3,882.68 |
| B | 3.89% | $582.60 | $3,235.93 |
| C | 4.15% | $586.32 | $3,459.30 |
Interest Rates
Some people will look at this and say that there is not enough difference to matter to them. Especially if they are only looking at the monthly payment.
If we compare only the highest and lowest rates (Bank A and Bank B), we will see that there is a 0.75% difference in the rates which means $10.78 difference in monthly payments and a total of $646.75 over the life of the loan. This is more than one of your payments so it would be like getting to skip a payment.
Imagine if you put that $10.78 in savings each month and opted for the lowest interest rate, you could use the $646.75 (plus interest) as a down payment on your next car.
You will likely buy many other items on credit so if you look for the best rates on every purchase, you stand to save more on a monthly basis and a great deal more over the course of several years.
Knowing and comparing finance charges should be part of your decision making anytime you are going into debt. This includes deciding which credit card you will carry as well.