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What Exactly IS a Finance Charge?
By Jill Terry
 You've
just been approved for a car loan. You're presented with a
legal-size document called a “Truth in Lending”
disclosure and asked to sign it. Scanning the document to
verify that the monthly payment is an amount you can handle,
you sign, accept your copy in a fog of new car bliss, and
never look at the document again.
Did you know that this document is supposed to be a tool you
can use to shop for the best financing? It's true--anybody
who acts as a creditor is required to give you, at your request,
a Truth in Lending statement before you engage in a transaction
so you can decide whether you want your loan financed by that
company or bank.
So, in a best-case scenario, you go to several car dealers
(or banks, depending on the kind of loan you need) and ask
them to provide you with a preliminary Truth in Lending statement
so that you can see how much your credit is going to cost.
But how will you know a good loan from a bad loan?
Check out the Annual Percentage Rate (APR), which is the
percentage cost of credit on a yearly basis. A major component
of the APR is the interest rate, but it's a rare occasion
when the APR and interest rate are the same. Why? Because
lots of fees called finance charges are also factored in.
Comparing only interest rates will not give you an accurate
picture of how much the credit will cost you. You must look
at APRs because they represent the cost of interest rates
plus finance charges.
Consumers have been told for decades that the APR is all
they need to know to compare credit costs--a statement that
is only partially true. Yes, the invention of the APR back
in 1968 was a giant step towards standardizing the articulation
of credit costs, but it's an imperfect system. Because the
law surrounding the question of whether or not a fee is a
finance charge is incredibly murky and complex, not every
cost associated with your loan will be classified as a finance
charge and included in the APR.
Once again, it's up to you, the consumer, to educate yourself
about fees. For instance, a credit report fee is not a finance
charge according to Regulation Z (the law that enforces the
Truth in Lending Act), and if you deal with a bank that charges
you for that report, that amount will not be factored into
the APR. Yet, it's a fee that you pay for, and it adds to
the cost of your credit. Two creditors may disclose exactly
the same APRs to you, and those APRs may be completely accurate
under the law, but if one of those creditors charges other
fees that are not technically finance charges, you are actually
paying more for a loan from that creditor.
When you're shopping for a loan, ask not only for an APR
but also for a list of all fees associated with the credit.
As you compare rates among other creditors and banks, look
over the respective lists. Here is a comprehensive roster
of fees that aren't finance charges under the law. Look for
them on your potential creditors' lists so that you'll know
what is and isn't included in the APR.
Fees That Are Not Finance Charges (includes residential
mortgage transactions):
- Application Fee: if charged to all applicants for
credit, regardless of whether credit is actually extended.
- Closing Fee: if charged by an escrow company to
perform loan closing procedures.
- Courier Fee: if used only at borrower's request
and not imposed by the creditor; or if essential for timely
evaluation of title.
- Credit Report
- Documentation Preparation: if charged to prepare
deeds, mortgages, reconveyances, settlement and similar
documents. If this documentation duplicates attorney's work
and is not bona fide and reasonable, the fee is a finance
charge.
- Electronic Funds Transfer: if used only at borrower's
request and not imposed by the creditor.
- Escrow Fee: if charged by escrow company to perform
loan closing services.
- Federal Express: if used only at borrower's request
and not imposed by the creditor.
- Filing Fee
- Inspection: if used to examine premises prior to
consummation as a bona fide and reasonable aspect of property
survey or appraisal.
- Notary
- Pest (or Termite) Inspection/Letter: if bona fide
and reasonable aspect of property survey or appraisal when
used to confirm the property's value or appraised amount.
- Property Survey
- Recording Fee
- Seller's Points
- Settlement Fee: if charged by escrow company to
perform loan closing services.
- Soil Report: if a bona fide and reasonable aspect
of property survey or appraisal when used to confirm the
property's value or appraised amount.
- Tax Service Fee: if used to check status for any
period prior to consummation; usually related to title examination.
- Title Examination
- Title Insurance
- Warranty Deed Preparation
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