Some auto loans may include a prepaid financing fee.
A prepaid finance charge is a type of charge that is applied to loans, usually mortgages. Sometimes called a PFC, this type of fee is usually charged when a borrower wants to close a loan before the start of a calendar month. This fee is typically listed with all other loan processing fees that are used to determine what type of out-of-pocket expenses the borrower must pay at closing. It is important to note that most finance charges are accumulated in the total amount of the loan and only a part of the total amount must be offered at closing.
Since the prepaid finance charge is about coverage for the period from the closing date to the first day of the following month, the numbers are usually calculated by identifying the number of calendar days involved. For example, if the closing date is the 15th day of a 30-day month, the total number of days to consider would be 15. Depending on how the APR is calculated, the APR would be divided by 365 or 360, providing an average daily rate. Then, this average daily rate would be multiplied by the 15 days of the period, and finally the prepaid finance charge would be obtained.
The amount of prepaid interest is usually provided as a breakdown of various costs associated with the closing process. This can often include other charges, some related to various types of subscription fees or document preparation fees. Each type of fee or charge is listed on a separate line, making it easy to determine how much of these closing costs are associated with each activity. In most cases, a significant amount of these closing costs are included in the loan amount itself, meaning the borrower does not have to offer the full prepaid finance charge or other fees at closing. The total amount required for closing is usually at the bottom of the closing cost list and represents only a percentage of that total.
It is important to note that the total amount of prepaid finance charges involved will vary from one loan situation to another. The value of the figure is influenced by the number of days used to calculate the annual rate, as well as by the rate itself. In most real estate deals, a prepaid finance charge projection is released at the beginning of negotiations and may actually fluctuate a bit until closing. Most of the time, changes are resolved by the time the final closing costs are presented to the buyer for their consideration, and will often be very close to the original estimates quoted at the beginning of the loan process.