Prepaid Finance Charge

Our local gas station just taped up a new notice in its front window. Every time we pay for gas using a debit or credit card, we’ll be charged a 25-cent fee. “What kind of malarkey is this?” we ask ourselves as we fill up our Prius.

This kind of malarkey isn’t actually malarkey at all. Rather, it’s something called a “prepaid finance charge”: a separate fee we automatically pay when completing a transaction.

We see prepaid finance charges all over the place—like our fave gas station—but one of the most common places they can be found is in the wonderful world of loans. If we, for example, decide to buy a house, we’ll have all sorts of prepaid finance charges attached to our closing costs: origination fees, administration costs, processing fees, etc. These fees are automatically added onto our bill, and must be paid in full if we want to conclude the transaction—i.e., if we want the home loan—which is why they’re considered “prepaid.” Sometimes these fees are negotiable, but usually only before we pay them. Also, since lenders don’t always tape notices in their windows telling us what kinds of fees we’ll be paying and how much they are, it’s wise to shop around, ask questions, read the fine print, and make sure we know what we’ll be asked to pay come closing time.