Some auto loans may include a prepaid financing fee.
A prepaid finance charge is a type of charge assessed on loans, most commonly mortgages. Sometimes called a PFC, this type of charge is typically charged when a borrower wants to close a loan before the start of a calendar month. This charge 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 of the finance charges accrue to the total loan amount and only a portion of the total amount must be offered at closing.
Since the prepaid finance charge is about covering the period from the closing date to the first day of the following month, the numbers are normally calculated by identifying the number of calendar days involved. For example, if the closing date is the 15th of a 30-day month, the total number of days to consider would be 15. Depending on how the APR annual rate is calculated, the annual interest rate would be divided by 365 or 360, providing an average daily rate. This average daily rate would then be multiplied by the 15 days of the period, finally arriving at the prepaid finance charge.
The prepaid interest amount is typically provided as a breakdown of various costs associated with the closing process. Often this can include other charges, some related to various types of underwriting fees or document preparation fees. Each type of fee or charge is listed as a separate line item, making it easier to determine how much of these closing costs are associated with each activity. In most cases, a significant amount of these closing costs is actually bundled into the loan amount itself, which means that the borrower does not have to offer the full prepaid finance charge or other fees at the time of closing. Typically, the total amount required for closing is found at the end 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 figure value is influenced by the number of days used to calculate the annual rate, as well as the rate itself. In most real estate deals, a prepaid finance charge projection is released at the start of negotiations and may actually fluctuate somewhat until the time of closing. Most of the time, changes are resolved by the time the final closing costs are presented to the buyer for consideration and will often be very close to the original estimates quoted at the beginning of the loan process.