What Are the Finance Charges for Your Car's Loan?

Curious to know what is a finance charge on a car loan? Upfront fees and an interest payment over time come together to form the full costs for borrowing.

Laura Leavitt | 

Mar 2, 2022 | 4 min read

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As you got started with the car-buying process, you probably did some research to know what you were getting into. While most spend a lot of time on the vehicle, it's also a good idea to research financing so you know you're getting a good deal. If you're considering a loan, you might have initially wondered what APR meant—and how it could affect your loan costs. At some point, you may have also asked, "What is a finance charge on a car loan?"

By understanding each of the terms involved in the buying and financing process, you can get a better picture of the commitments you're making as a borrower. Ultimately, knowing the full cost of a car loan can help you stay within your budget.

Understanding Your Finance Charges

The finance charge can apply slightly differently in different contexts, but the general accounting definition is simple: it encompasses all the costs associated with borrowing money. In the case that you're asking what a finance charge on a car loan is specifically, it will typically be any kind of upfront fee to finance the car, as well as all the interest you pay over the term of the loan.

It's common for multiple fees—including paperwork fees for the effort of originating a loan—to be rolled into the overall APR, instead of paying them upfront. If you want to work out the total finance charge using the term and monthly payment amount, you can conduct this simple calculation:

• Multiply your monthly payment by the number of months you'll be paying
• Next, subtract the original principal (the amount of money you're borrowing to pay for the car) from that total
• The resulting amount is your finance charge, or all of the interest you'll pay. Keep in mind that it might include other fees, like registration and title, depending on what was rolled into your loan

There are more complicated ways to calculate your total finance charge, but the method above shows the difference between the balance borrowed for the car's price and the total costs that you owe the bank. As always, it's important to read the potential fees sections of your car loan documentation in case there are other costs involved beyond the scheduled monthly payments.

What to Do With Finance Charge Information

Once you have learned about finance charges on car loans, you may not know what to do with that information. That's common. Most finance charges are either hundreds or thousands of dollars, and you may not know what you can do to reduce that number.

Here are the main levers that borrowers use to shift that number lower when shopping for a car loan:

• Choosing a shorter-term loan, as this can often result in a lower interest rate (though not always) as well as less interest being paid overall in the finance charge
• Asking whether there is any way to negotiate the interest rate down or remove any optional add-ons that the lender is offering
• Getting the full details on promotional rates and deciding whether they are worthwhile compared to a typical auto loan. An example would be a five-year loan where the first year has a 0% APR, but the following years have such high APR that you would likely pay less overall with a non-promotional rate
• Shopping around and checking with at least a few different lenders, as this can help you verify that you've found the best interest rate for you
• Improving your credit score can also yield lower interest rates in the future—if you're willing (and able) to wait and buy a car in the future.

So, what is a finance charge on a car loan? When you understand all the charges involved, you can make more informed choices about the process and the purchase itself. With that insight, you can buy with clarity and confidence—a great feeling for a new car owner.

Laura Leavitt

I love a good spreadsheet and will happily calculate compound interest all day, but my biggest focus is helping people achieve their financial goals. That could be saving up for a dream car or calculating the right car payment for your budget so you can get a reliable daily driver. I research and write about personal finance so that making great financial choices becomes easier for us all.