When is a finance charge typically assessed?

A finance charge is typically assessed when a payment is late. This charge serves as a fee for the extension of credit and as compensation for the risk the lender takes by allowing the borrower to delay payment. When a borrower fails to make a payment by the due date, the creditor often imposes a finance charge as a penalty for this tardiness.

In this context, finance charges can accumulate due to overdue balances, which reflects the cost of borrowing money beyond the intended payment schedule. Although overdue balances would also indicate a situation where finance charges could apply, it is specifically the lateness of the payment that triggers the finance charge as an immediate response to the violation of the agreed payment terms.

Other contexts such as assessing charges for every transaction or offering prompt payment discounts do not typically fall under the definition of a finance charge. While each transaction may carry costs, they are usually not labeled as finance charges unless there is a lingering debt or missed payment involved.