Below you will find two sharp examples where I think for sure that both our visitors and even quality reviewers from website think the pricing tool is wrong. Although it does not.
Suppose we want to know the price of a loan of USD 5000 for a period of 3 months. When this text was written you could find this result which may seem incorrect – but
The cause of misunderstanding
Different loan products are amortized in different ways. An annuity loan uses annuity. This means that the loan is paid for entirely with monthly payments that are equal throughout the term. Annuity is difficult to understand if you look at the equation itself but easy to apply (when you know how to do). Test our annuity loan calculator to make sure we count correctly.
Account credits are basically the opposite of repaying as quickly as possible. Instead, there is a minimum amount to be paid, but it is not the same as the entire loan being repaid within a certain interval.
You can, of course, do it, but more likely is that the arrangement is such that you should not do it. We have made the assumption that most customers will eventually pay off the loan at the rate suggested by the lender, which will then be the minimum amount.
But since you still want to know the price for the maturity you chose, we must also present the cost as an average payment if you decide to actually choose to pay off the entire loan, right? We must therefore make adjustments to the loan differences in order to make a fair comparison.
The alternative would be to just write the minimum payment USD 500 with the heading “monthly payment”. I would like to say that it steals more than it helps as it ultimately most likely leads to a much higher cost since most people learn to let the loan run considerably longer than planned. Exactly what the lender wants.
Therefore, the price comparison feels “wrong”
- Loan A is an annuity loan. The loan is repaid at a higher rate. The lender follows the proposed installment plan.
- Loan B is an account credit.
- The loan is slowly amortized with the assumption that you are comfortable and follows their proposed installment plan (minimum installment) for 2 months but still chooses to repay the entire remaining amount last month. Therefore, the cost of capital will be higher despite all the usual signals that this loan is the better choice.
Make sure it is correct
If you instead chose the maturity of 1 month then both loans would have been repaid at the same pace. And as you can see from the picture below – the loan with the lowest effective interest rate also gets the lowest capital cost. As we are used to it to be.
If loan B was not an account credit but instead an annuity loan with a higher repayment rate, then loan B would have been cheaper all the time. Different loan products are thus difficult to compare if you only go for effective interest rates.
Don’t forget that the lenders’ strategy is to find ways to suck the customer out of money – especially after the new fast-loan law came into force that requires interest rates. The only solution to withdraw the money is to get the borrowers to repay the loans more slowly. Neat? Now you also know why many sms loans have been converted into account credits!
I hope you at least learned intuitively how things work.
In fact, understanding this is so tricky without explaining that it is simply a necessity to read this. If you do not, the likelihood is high that you think the price comparison is wrong.
Now, hopefully, I have cleared up any misunderstandings and made you realize that our price comparisons are correct.