Loans What Is a Prepaid Finance Charge? A Prepaid Finance Charge Explained in Less Than 4 Minutes By Jamie Johnson Jamie Johnson Website Jamie Johnson is a sought-after personal finance writer with bylines on prestigious personal finance sites such as Quicken Loans, Credit Karma, and The Balance. Over the past five years, she’s devoted more than 10,000 hours of research and writing to topics like mortgages, loans, and small business lending. learn about our editorial policies Updated on June 11, 2022 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board In This Article View All In This Article Definition and Example of a Prepaid Finance Charge How a Prepaid Finance Charge Works Types of Prepaid Finance Charges Photo: d3sign / Getty Images Definition A prepaid finance charge is an upfront cost a borrower pays related to a loan agreement. It’s a charge you’ll pay in addition to your monthly loan payments, typically at your loan closing. A prepaid finance charge is an upfront cost a borrower pays related to a loan agreement. It’s a charge you’ll pay in addition to your monthly loan payments, typically at your loan closing. Origination fees, underwriting fees, and loan insurance are a few examples of prepaid finance charges. Knowing what prepaid finance charges you have to pay will help you determine the total cost of the loan. Definition and Example of a Prepaid Finance Charge A prepaid finance charge is an upfront fee you’ll pay when you close on a loan. These additional fees are separate from your monthly loan payments. However, they add to the total cost of the loan, so you want to consider these charges before agreeing to your loan terms. For instance, if you take out a personal loan, some lenders will charge a one-time origination fee. This fee covers the cost of processing the loan, and the exact amount can vary depending on your lender. However, most origination fees cost between 0.5% and 1% of the entire loan amount. That means if you take out a personal loan for $20,000, you could end up paying an origination fee between $100 and $200. How a Prepaid Finance Charge Works Before you agree to the final loan terms, you want to understand how much you’ll have to pay in prepaid finance charges. These upfront costs are paid in addition to your monthly loan payments and affect the total amount you pay on the loan. For instance, if you take out a conventional mortgage and your down payment is less than 20%, your lender will require you to purchase private mortgage insurance (PMI). PMI is a prepaid finance fee that covers your lender if you stop making your payments. Many of the prepaid finance charges you encounter are designed to protect the lender or cover the cost of underwriting the loan. But sometimes, lenders will try to add on unnecessary and excessive charges, commonly referred to as “junk fees.” Junk fees are inflated costs your lender adds on at closing, usually as a surprise. Junk fees aren’t illegal, but you have the right to negotiate with your lender for fair and affordable costs. In 2015, the Consumer Financial Protection Bureau (CFPB) implemented a rule that lenders cannot inflate fees to more than 10% of the original lending estimate. Note The Truth in Lending Act requires lenders to disclose prepaid finance charges upfront before you sign the loan contract. This regulation protects borrowers from unfair and misleading lending practices like junk fees. Types of Prepaid Finance Charges Let’s look at some of the most common prepaid finance charges you’ll encounter. Origination Fees An origination fee is what the lender charges you for initiating the loan. It covers the cost of administrative services like processing the loan application and funding the loan. Origination fees typically cost between 0.5% and 1% of the entire loan amount, and you can find the total costs listed on your loan estimate. Private Mortgage Insurance Private mortgage insurance (PMI) is another type of prepaid finance charge. PMI is required on most conventional mortgages if your down payment is less than 20%. It protects the lender if you stop making payments on your mortgage. PMI typically costs between 0.5% and 1% of the entire loan amount. Discount Points Discount points are a one-time fee you pay to lower the APR on your mortgage. You pay a higher cost upfront in exchange for lower monthly payments. Discount points are based on the loan amount, with one point equaling 1% of the loan. For instance, one point of a $250,000 loan would be $2,500. So you would pay $2,500 upfront and receive one point off your APR. Key Takeaways A prepaid finance charge is an upfront fee you’ll pay when you close on a loan.You’ll pay these upfront costs in addition to your monthly loan payments, so it affects the total cost of the loan.Occasionally, lenders will add on excessive and unexpected fees at closing, known as junk fees.The Truth in Lending Act requires lenders to disclose these fees upfront before you sign the loan contract.Origination fees, private mortgage insurance, and discount points are examples of prepaid finance charges. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Consumer Finance Protection Bureau. "What Are Mortgage Origination Services? What Is an Origination Fee?" Accessed Oct. 15, 2021. Rocket Mortgage. "Mortgage Origination Fee: The Inside Scoop." Accessed Oct. 15, 2021. North Carolina Consumers Council. "You Can Save Money by Understanding the Fees and Costs When Buying and Selling Real Estate." Accessed Oct. 15, 2021. Consumer Financial Protection Bureau. "Can My Final Mortgage Costs Increase From What Was on My Loan Estimate?" Accessed Oct. 15, 2021. Consumer Finance Protection Bureau. "Content of Disclosures." Accessed Oct. 15, 2021. Rocket Mortgage. "Mortgage Origination Fee: The Inside Scoop." Accessed Oct. 15, 2021. Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed Oct. 15, 2021. Rocket Mortgage. "What Is PMI? Private Mortgage Insurance Defined and Explained." Accessed Oct. 15, 2021. Consumer Financial Protection Bureau. "What Are (Discount) Points and Lender Credits and How Do They Work?" Accessed Oct. 15, 2021.