# How to Calculate the Finance Charge on the Amount of a Loan

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Finance charges on a loan can be calculated if you know the terms and conditions of the loan. The longer the term of the loan, the more you pay in finance charges at a given interest rate. The interest rate is another factor in determining finance charges. Finance charges are calculated based on the unpaid balance. The faster the balance is reduced, the less you pay in total finance charges. Having good credit helps ensure you receive a lower rate of interest.

## Gather the Necessary Information

Obtain the terms and conditions of your loan, including the principal balance, interest rate and length of the loan. A loan with a principal balance of \$35,000, an interest rate of 8 percent, a loan term of 120 months and a monthly payment of \$424.65 will be used here as an example.

## Determine the Finance Charges

Calculate the finance charges for the first month by multiplying the annual percentage rate of 8 percent (.08) by the balance of \$35,000. Divide the result (\$2,800) by the number of months in a year (12). That produces the finance charges for the first month, which is \$233.33.

To determine the first month's principal payment subtract the finance chanrge of \$233.33 from the monthly payment of \$424.65. The resulting \$191.32 is the principal balance payment, which is the amount the initial loan is reduced after one month. The remaining loan balance would be \$34,808.68.