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.

## Follow the Formula

To calculate the finance charges for the second month, when the balance in our example would be reduced to $34,808.68 ($35,000 minus $191.32 in principal payment), use the same formula used above, substituting the new balance.

This calculation can be done every month with this formula, although it would be time consuming. The loan calculator can make this calculation for each of the 120 months. Notice that finance charges are reduced every month after a payment has been made, indicating that making principal payments greater than the minimum required will reduce the total finance charges.

## Utilize an Online Calculator

Use an online loan calculator to determine the total finance charges for the life of the loan, assuming it is not paid off early. Enter loan terms, including balance ($35,000 in our example), length of loan (120 months in our example) and interest rate (8 percent in our example), into the calculator and hit the "Show/Recalculate Amortization Table" button. Finance charges will be automatically calculated and displayed. In our example, the total finance charges for the life of the loan will be $15,957.59.

References

- Bank Rate: Mortgage Calculator
- The Calculator: Finance Charge Calculator
- Finance Charge Caculator
- Consumer Financial Protection Bureau. "Finance Charge." Accessed July 15, 2020.
- Federal Reserve Bank of New York. "Pre-COVID-19 Data Shows Household Debt Increased in Q1 2020, Though Growth in Non-Household Debt Slows." Accessed July 15, 2020.
- Federal Reserve Bank of New York. "Household Debt and Credit, 2019: Q4." Accessed July 15, 2020.
- The Wall Street Journal. "Markets." Accessed July 15, 2020.
- Federal Trade Commission. "Disputing Credit Card Charges." Accessed July 15, 2020.
- Consumer Protection Bureau. "On a Mortgage, What's the Difference Between My Principal and Interest Payment and My Total Monthly Payment?" Accessed July 15, 2020.

Tips

- To calculate the finance charges for the second month, when the balance in our example would be reduced to $34,808.68 ($35,000 minus $191.32 in principal payment), use the same formula used in step 1, substituting the new balance. This calculation can be done every month with this formula, although it would be time consuming. The loan calculator can make this calculation for each of the 120 months. Notice that finance charges are reduced every month after a payment has been made, indicating that making principal payments greater than the minimum required will reduce the total finance charges.

Writer Bio

Melvin J. Richardson has been a freelance writer for two years with Associated Content, and writes about topics such as banking, credit and collections, goal setting, financial services, management, health and fitness. Richardson has worked for several banks and financial institutions and gained invaluable experience and knowledge. Richardson holds a Master of Business Administration in Executive Management from Ashland University in Ashland Ohio.