How do you calculate the finance charge?

How do you calculate the finance charge?

• A. PI payment X number of payments - loan amount
• B. Loan amount x interest rate
• C. Total payments minus closing costs
• D. Sum of all payments over the term

Answer: (A)

The finance charge is the total cost of credit over the life of the loan. To find it, determine the total amount paid during the term and subtract the amount financed (the loan amount). If you multiply the periodic principal-and-interest payment by the number of payments, you get the total payments for principal and interest; subtracting the loan amount yields the finance charge. This matches the standard formula: finance charge = total of payments minus amount financed. The other options don’t correctly isolate the finance charge: multiplying the loan amount by the interest rate gives only simple interest on the loan, not the total cost over time; subtracting closing costs from total payments ignores other charges that are part of the finance charge; and simply summing all payments gives the total payments, not the finance charge unless you also subtract the amount financed.

The finance charge is the total cost of credit over the life of the loan. To find it, determine the total amount paid during the term and subtract the amount financed (the loan amount). If you multiply the periodic principal-and-interest payment by the number of payments, you get the total payments for principal and interest; subtracting the loan amount yields the finance charge. This matches the standard formula: finance charge = total of payments minus amount financed.

The other options don’t correctly isolate the finance charge: multiplying the loan amount by the interest rate gives only simple interest on the loan, not the total cost over time; subtracting closing costs from total payments ignores other charges that are part of the finance charge; and simply summing all payments gives the total payments, not the finance charge unless you also subtract the amount financed.