When compound interest is not in your best interest

These days, there seem to be so many different loan options available to us. Ranging anywhere from 3 month short-term loans, right up to 5 year-long term loans.

Financial institutions make it sound so easy to obtain credit. What they neglect to inform you of though, is how difficult and expensive it is to repay these loans. Giving you the option of extending your loan period may make them sound like they are doing you a huge favour, but in the meanwhile, they are the only ones who are really benefitting from these extended repayment periods by means of extremely high interest rates.

One such loan offer arrived in my mailbox a few days ago, offering me “easy cash for whatever you need it for – now.” They make it sound so easy, in that they will grant you the loan, and you can take anywhere from 24 months to 5 years to repay it.

Upon further investigation, however, I realised that the only people benefitting from this arrangement, would be the loan institution themselves, owing to the extremely exorbitant interest rates they are charging. Yes, the rates may be legal, but they are still absolutely ridiculous, in most cases, requiring you to repay almost double what you initially borrowed, and should you extend your loan repayment period, you will end up paying back more than double what you initially borrowed.

In the small print (don’t we just love how all the really important information is normally classified as “small print?”), it states that interest rates vary between 19% and 26% (compounded monthly), and that the repayment amount is also subject to a monthly service fee, and also does not include a once-off initiation fee, which will vary, depending on the amount of your loan.

Don’t get me wrong, but surely, the amount of work required to process a loan for R10 000/$1334, will be the same as that of a loan for R40 000/$5335? So, in my opinion, why should the initiation fee rise per the amount of your loan? Just another way for the financial institutions to extricate a few more of your hard-earned rands or dollars from you.

I don’t know about you, but to me, this form of loan is the fastest way to ensure that you pay twice for whatever you may be taking the loan for, be it a car, or even for a holiday or anything else. Does the item that you are taking the loan for, really warrant being paid for twice or three times over?

Yes, sometimes, emergencies do happen in life, and a loan is your only option, but always think long and hard, and shop around for different interest rates, before committing to the first offer that lands in your mailbox. There is almost always a better, more cost-effective option available.