Under the Consumer Credit Act, all lenders are required to indicate their effective interest rates on both the application and the loan agreement. The reason for this is that it should be easy to compare loan costs with the different lenders and that is obviously good, but unfortunately this does not work out particularly well in all situations that you will soon see.
Here you can compare sms loans and prices for different loan amounts.
When talking about effective interest, you refer to the annual interest rate plus all the fees the loan has, but also the number of repayment occasions affects it. This is a good measure when comparing loan costs for private loans, mortgages and other loans that are set up for at least one year, but hardly if you want to compare fast loans with ordinary private loans because fast loans that are arranged for a few weeks or months and private loans for at least 1 year.
Of course, if you see that a sms loan has an effective interest rate of maybe 100, 200 or 300% it sounds like a lot, and so it is if you paid off on it for one or more years, but you usually don ‘ t. And those fast loans that actually have several years maturity usually have an interest rate of about 10 – 30%, not several hundred percent.
We will now give you two examples that illustrate why the effective interest rate can be a little misleading when it comes to short sms loans.
A sms loan of $5000 which has an effective interest rate of 120% and repaid after 1 month costs $500 which is as much as a private loan of $5000 with an effective interest rate of 20% repaid over 1 year. Sure, the sms loan is still considerably more expensive than a private loan that has an interest rate of, say, 5%, but the difference is not as great as the effective interest rate can lead us to believe. A loan with 5% in effective interest costs $365 less than the sms loan in the above example.
For example, if you take out a loan of $2000 and pay it off within a month, the majority of sms loans have a loan cost of $200 – 400. Okay, it is not very cheap but may not be as expensive as many people think after looking at the effective interest rate. In any case, this means that you pay 10-20% of what you have borrowed, not 200-400% of the effective interest rate.
However, it is important that you avoid sms loans that can be raised for 1 year or longer if it has a three-digit interest rate. Ideally, the effective interest rate should not be higher than 30% if you put up the loan for 1 – 2 years and it should be even lower if you choose a longer repayment period than that.
There are thankfully quite a few fast loans with year-long maturities that have an effective interest rate of 10 – 30%, so finding such interest rates is no problem even if you are looking for such a loan.
However, there is a great advantage when comparing sms loans, it is that you always see exactly what the loan will cost already when applying for a loan, so it is not when you compare private loans. This is partly because all sms loans have a fixed interest rate (it does not change during the term) and partly because all applicants receive the same interest rate (it is not individual). In our “compare loans” menu above you can therefore easily see exactly what your sms loan will cost, while the loan costs for the private loans we compare are not set in stone because they have an individual interest rate.
It is not really possible to compare loan costs for private loans without contacting the banks in person or through a loan intermediary since the interest rate for private loans is individual. The interest rate you receive depends on your ability to pay and your financial history, as well as the value of your collateral if you take out a mortgage or a car loan with collateral.
The comparison sites that compare private loans usually compare the lowest possible interest rate anyone can get, but most applicants do not get that low interest rate and therefore effective interest rate is a blunt comparison tool before you know what interest rate you really get.
We at Ritelend Finance have also chosen to use the so-called “from-interest” when we calculated the loan costs you find in our tables regarding private loans. You should therefore take these borrowing costs with a pinch of salt. Initially, we intended to use the banks’ example interest rates or average interest rates, but this did not work either, as they usually only specify the example interest rate for a single loan amount with a certain maturity. Well, the loan costs for private loans that we compare in any case give you a hint as to which one is the cheapest.