One of the challenges of understanding which loan options are best is that the cost of each option is a mix interest rates and fees. And it’s often hard to translate fees into interest rate equivalents so you can do an “apples to apples” comparison.
But you should do the work. To convince you, I’m sharing this screen shot taken from LendUp, a company that bills itself as a “payday loan alternative.”
If you’re not familiar with payday loans, these are very short term loans for modest amounts of money that give people – usually low income, unwealthy people – a brief bit of extra cash that needs to be paid back shortly, with a fee. The LendUp fee schedule should give you the idea:
If you are so unfortunate that you desperately need $100 to get you through the next two weeks until payday, you can get that from LendUp. The $15 fee doesn’t seem outrageous until you do the math. The APR – Annual Percentage Rate – is 391.07%.
If this was your business, would you consider borrowing money at an annual rate of almost 400%?
The main point I’m trying to make here is that seemingly “modest” fees can translate into extremely expensive money.
Now, in many cases the APR advertised by debt providers includes all of the fees. That’s what LendUp has done here, as required by law. But not all the possible fees are included all the time! For example, a late payment fee that hits you five times over the course of a year as you’re struggling with cash flow can end up as a very high APR.
Gotta watch those fees!