Finance Charges Law and Legal Definition

Finance charges are the sum of all charges, payable directly or indirectly by the person to whom credit is extended, and imposed directly or indirectly by the creditor as an incident to the extension of credit. The amount of the finance charge includes late charges and other charges resulting from or arising out of late payment, delinquency, default, or other like occurrence. Finance charges are regulated by state and federal laws.

State laws may establish a maximum rate allowed to be charged as a finance charge. The main federal law governing finance charges is the Federal Truth-in-Lending Act. The Act is designed to ensure full disclosure about finance charges in loans and prevent unfair business practices by lenders. Among other requirements, it requires creditors to disclose the cost of consumer credit as an annual percentage rate (APR), in addition to disclosing finance charges as a dollar amount. It also sets out procedures for correcting billing mistakes. The Truth in Lending Act doesn't set the rates or tell the creditor how to calculate finance charges.