What are the financing fees?

A financing fee or finance charge refers to any cost that is related to borrowing money. In simple words, any costs an individual or a company have to pay while borrowing money. It is known as the financing cost or borrowing cost. 

The most common type of financing fee is interest charge. Finance fees also include any other fees which are related to borrowing like late fees, account maintenance charge, annual credit card charge, etc.

Banks or any other financial institution make profit by lending money to borrowers. Financing fees are the main source of their income to run such a business organization. Those charges are calculated against loan amount, credit cards, credit line and any other type of financing. Finance charges may be imposed as a percentage on outstanding loan amounts. 

A Company can use two different sources to fund its operations. They are: 

• Equity Financing: Equity financing is selling the ownership of the company to get various investors and raise money for business operations. One of the main advantages of this type of financing is that you do not have to repay the money that has been borrowed from the market. In return for the money, you have to share the business profit.    
• Debt financing: Debt financing is raising money by borrowing from a lender, a bank or any financial institute and to be repaid in the future. Financing fees mainly refers to the cost related to debt financing. 

Types of Debt Financing

There are mainly two types of debt financing. Those are: 

Short Term Financing: Short term financing is the service provided by banks when a user faces unexpected expenses and their account reaches zero balance. When this kind of incident occurs, banks give a short loan instantly to pay for those expenses. This is called short term financing.

Credit card facilities usually come up with short-term financing. Short time financing charged annually. If the credit card holder pays the fees on time, no interest will be charged. Only by providing maintenance fees users will get the short time financing service. 

Long Term Financing: The long-term and medium-term financing has some fees, and that are usually taken by the bank when the user applied for the loan. The loan application fee is the same, the interest rate might be charged depending on the profile and the amount. 

Types of Financing Fees

1. Interest Rate: The interest charged for a loan most often depends on the amount borrowed. For example, at the end of a 25-year mortgage loan of $100,000, carrying a 5% interest rate per year, the borrower will have paid a total of $125,000 in interest charges which is more than the principal loan amount.
2. Origination Fee: This fee is imposed before taking the loan. This fee covers the processing of the loan application, underwriting, and preparing necessary documents for the loan. Origination fee is decided based on the amount that is applied for the loan. 
3. Maintenance Fee: This fee is deducted by the bank for securing money and providing other facilities to the users. For example, you are saving your money in the bank, they are taking care of your money, and giving you the facilities of making monthly transactions. For providing all those facilities the bank will charge you some money from your account. The amount the bank will deduct from your account is the maintenance fee. 
4. Credit Cards Fee: Credit card fee is the amount a bank charges for offering credit card services. Usually, this charge is deducted annually. This fee is deducted for giving users the benefit of moving cashless. Also, users can withdraw their money whenever they want.  
5. Credit Card Due Payment Charge: Credit cards give its users a benefit that they can use the money on credit and pay it later. But if someone fails to pay the credit card bill later, the user must impose a fine for paying late. This fine is known as credit card due payment charge. 
6. ATM Charge: With time the use of financial institutions like banks is increasing day-by-day. Banks are also trying to serve the best quality services. To reduce hassle from user’s lives, every bank is now offering debit and credit card facilities by setting up anonymous ATM booths. Most of the banks offer free transactions for their own users but other users can also make the transaction by giving a transaction charge.       
7. Transaction fees: Transaction fees is the amount charged for crossing the maximum allowable monthly limit of transactions in a bank or a financial institution. For Example, a financial institution allows its users to make transactions only ten times a month for free. Every transaction over ten times crosses the monthly limit and incurs a transaction fee. 
8. Late fees: Late fee refers to the charges a borrower needs to pay for failing to pay within the due date. For example, if an individual takes out a loan from a financial institution and missed the due date to pay the installment fee, he/she might pay some extra amount for paying it late. 
9. Prepayment Penalty: This charge is imposed on mortgage related financial activities. A prepayment penalty is a fee that lenders charge when a borrower pays all the amount of mortgage loan earlier. The prepayment penalty fee helps borrowers to pay back their loan slowly over a longer period of time and allows mortgage lenders to collect interest over a longer period of time. 
10. Mortgage Insurance: Mortgage insurance is an insurance policy. It protects the mortgage lender, if the borrower fails to repay the payment. This policy also protects lenders if the borrower passes away or is unable to meet the contractual commitment. In Canada, some popular mortgage insurance companies are:

• Scotiabank Mortgage Insurance
• TD Mortgage Insurance 
• RBC Mortgage Insurance
• CIBC Mortgage Insurance
• Manulife Mortgage Protection

Limitations on Interest Incurred in Canada

You can reduce the interest rate on the money borrowed for personal purpose, business purposes or to purchase property. But there are some limitations on deducting interest.   

You can subtract the interest amount that is incurred on money borrowed for business purposes or if you acquire property for business purposes. However, there are limits:

Loan fees, penalties and bonuses: You can reduce any fee or bonus a financial institution charges you to pay off your loan, if you clear it before it is due. Give the fee or bonus as prepaid interest and your interest charge will be reduced over the remaining original loan balance. 

Over Five Years Deductible Fees: You have to incur fees like application fees, insurance, processing and other fees including loan guarantee, brokerage, and legal financing fees If you borrow money to buy a business property or you borrow money to improve your existing one. These fees are deducted over five years despite the terms of your loan. If you repay it before five years, then you can reduce all the financing fees.  

How Do Credit Card Companies Calculate Finance Charges?

When you apply for a credit card, your lender can decide the terms and conditions and finalize how finance charges will be calculated. Calculation and rates may finalize considering issuers and in agreement between lender and borrower.  

The most common methods how they can be calculated:

Average daily balance: The average daily balance is calculated by adding balance per day and then dividing the total amount by the number of days in the billing cycle. This is the most common method to be considered. If your issuer uses this method, it can be beneficial for you to pay your balance throughout the month and lower your daily balances.

Daily balance: In average daily balance, your issuer calculates the actual balance you bear each day of your billing cycle. Instead of taking the average, your Annual Percentage Rate (APR) balance is multiplied by 1/365 to find the daily finance charge. 

Two-cycle billing: This method in which you are charged interest on two cycles of your card balances, not just the most recent. This method can result in already paid interest charges in debts and outlawed under the Credit Card Act of 2009.

Previous balance: Under this method, the charges are calculated based on the balance carried over from your previous billing cycle to the new billing cycle.

How to Avoid Financing Fees

Paying your financing fee fully and on time each month is the best way to avoid finance charges. As long as you pay your full balance within the due date, no interest will arise on your balance. No matter which method your lender uses, you will find financing fees calculated into your next statement if you just pay the minimum amount due. 

The other types of financing fees like balance transfer charge, late fees or cash advance fees are difficult to avoid. But if you use them you will have to pay some financing fee. Consider before using whether taking these charges is worth giving you benefits. 

Comparably, if your card has a zero percent opening APR promotional offer, make sure you read your terms and conditions to understand the financing fees. You will take on if you have not paid your balance in full by the end of the introductory period.

Financing is required in every business or in every person’s life. Borrowers get the money in time of need and lenders get the interest rate that can become an earning source. As well as, all those activities incur some costs. Financing fee is basically the amount lenders get in terms of providing the benefits and the charges for maintaining those financial activities.