PERSONAL LOANS 101
by Grace Neville
Know what you are doing before you sign on the dotted line! Always keep three (3) important numbers in mind:
- The Principal – the amount you borrow
- The Term – the amount of time you have to repay the loan
- The APR – the “annual percentage rate”, or the amount of interest you would pay if the loan term were one (1) year
APR is a very important number to know. By law, every loan company must tell you what this annual rate is. APR tells us which loans are more expensive … and which ones are cheaper! Are there any fees? Early payoff? Late payment fee? Application fee? What other fees can you be charged?
Different loan products have different terms. For example, payday loans often have very short terms, such as a couple of weeks, whereas personal installment loans can be paid back over the course of a few months. Depending on your situation, you may find that one loan term is preferred, but to do so, you must consider APR too!
Let us say you take out a payday loan for $500 and in two (2) weeks you must repay it for $575 – the $500 in principal and $75 in “interest”. At face value, that seems like a low rate because using “simple interest” the payday loan company is only charging 15%…right? Wrong!
To compare our payday loan here to a more conventional installment loan, we must use APR. The payday term is only 14 days but rolled over for one year to get correct APR, interest would be almost 400%. Yikes!
If you borrowed the $500 payday loan for six months instead of two (2) weeks like it was required…If you were only paying $75 every two (2) weeks to “roll over” the loan, you would pay a total of $900 in interest!
A consumer installment loan might require you to borrow $500 and repay it back over the course of 6 months with an APR of 99%. If you paid the loan down each month, you would owe $108.98 each month for six months. Comparing that to your two (2) week payday loan, you would only owe $153.88 in interest and you would save $746.12 in interest. Wow!
Please keep these three (3) important numbers in mind anytime you are looking to take out a loan. By making sure you know your term and APR, in addition to how much you want to borrow you can shop around for a loan that fits your needs and your budget.
Also keep in mind that some lenders will tell you an APR and then add on additional fees to your loan. Any additional fees should be added into your loan as “interest” so you can accurately compare APRs.
For instance, at Brother Loan & Finance and our sister companies, we do NOT charge any additional fees to our customers for taking out a loan. All our loan products have a flat APR and standard terms (often 6 months) to provide clients with the best financial flexibility they need. Additionally, we do not perform a credit check on our borrowers. For our clients, their job is their credit and if they have been working for a year or more; have a driver’s license or state ID; can show proof of address…they are well on their way to getting up to $1500 TODAY…while paying SO much less in interest.
Grace Neville has devoted over 30 years to creating innovative and customer-centric lending programs, growing a single local loan store to over a dozen community locations in three states. She is passionate about teaching financial literacy to professionals and consumers. Want to check out her company? Visit www.brotherloan.com.