What is the difference between capitalized fees and accrued fees in a loan agreement?

Study for the Specialist Automotive Finance Test. Use flashcards and multiple-choice questions with detailed explanations to get exam ready!

When fees are capitalized, they’re folded into the loan amount. That means the outstanding principal goes up by the amount of the fees, and interest is charged on this higher balance going forward. So the fees aren’t just a one-time cost; they become part of what you owe and the total interest you pay increases over the life of the loan. Accrued fees, by contrast, are costs that have built up but aren’t added to the loan balance yet—they may be paid later or capitalized, but until that decision happens they don’t inflate the principal or accrue interest as part of the loan. Therefore, capitalized fees directly raise the loan principal and then accrue interest, which is why that option is correct.