When a product is purchased through an e-store, this is extremely often done today with a payment solution from a major credit company, for example Caryl. When payment options are chosen, you can choose to pay everything at once or pay part over a certain period. With a low monthly payment it can be attractive with part payment – but it tastes so expensive.
Caryl chooses to present an example on their website. It is then a purchase that takes place at USD 10,000 and is then paid for 12 months. With the interest rate of 19.90% and the charge of USD 29 per month, the effective interest rate is 29.22%.
About high cost credits
In the investigation of a new fast-loan law, a high-cost credit is defined as a credit with an effective interest rate of over 30% + the applicable reference rate. According to the investigators, 30% of the effective interest rate is currently a high-cost credit. In the example above, Caryl is very close to that limit and it is sufficient to change the minimum in the example in order for the effective interest rate to exceed 30%.
This can be compared to fast-cash companies like Best Lender with an annual interest rate of 25.74% and effective interest rate 29% and criticized Good Finance with an annual interest rate of 29.17% and effective interest rate 33.4%.
What will be the difference in credit cost in the end? Let’s take a look and take into account that 30% of the interest cost is deductible.
What does this mean?
It is important to take into account how much of the cost is interest and is deductible in the declaration and how much of the cost consists of other fees if you want to get a complete picture of the loan cost.
It is also interesting that Good Finance received a lot of criticism in comparison with Caryl, even though the cost difference in the example above is actually negligible. Best Lender was even cheaper. It is interesting that same day loan are generally automatically criticized regardless of the layout, while Caryl is seen as a “good, well-liked and obvious” product by many Swedes.
People buy the criticism straight away and generally miss that the word “fast loan” or “sms loan” is a vague definition that does not take into account neither the layout nor the cost development. In the above example, we have selected the cheapest alternatives. However, it is true that most SMS loans have a significantly higher regular price. You can learn more about what makes a sms loan expensive and where the actual problems consist of if you read the article “What is true about sms loans?”.
With lower amounts, the effective interest rate increases
Arvato is one of the credit companies that cooperates with E-retailers and offers customers partial payment. This is the same as Caryl. On an invoice you can read ” Effective interest for partial payment of USD 2000 over 6 months is 61.13%”.
So this is not a constructed example to demonstrate the high costs of part payment but exactly what they chose to print on an invoice sent to a customer (with low invoice amount).
At larger amounts, the effective interest rate will be lower. This is due to the fact that the fixed costs, such as setup fees and management fees, constitute a smaller part of the total credit. In one example, they mention that a purchase of USD 10,000 divided over 12 months will have an effective interest rate of 30.05%:
It is thus very clear that the lower the amount on which the installment is made (and the shorter the installment time), the higher the effective interest rate.
Part payment should not be made in small amounts
Of course, it can be argued that part payment should not be made in such small amounts for so long. With this reasoning it is also possible to claim that the effective interest rate will be misleading as it is not a partial payment of at least one year. However, those who use these arguments should in that case also apply them to the fast loans, which are also not intended to be used for long-term amortization. This makes the effective interest rates very misleading.
The combination of paying as small a sum as USD 2000 and doing this for a whole 6 months is relatively uncommon. The vast majority of lenders that lend such a small amount require the loan to be repaid for 1-3 months. But some examples can be mentioned to put it in perspective:
- Quick loan – Borrow USD 2000 for 3 months – pay USD 496 (Effective interest rate 288.8%)
- Secured Credit – Account Credit – Borrowing USD 2000 for 6 months – Paying about USD 240 (Effective interest rate 28.02%)
- Annual loan / Quick loan – Borrowing USD 3000 (minimum amount) for 12 months (shortest time) – Pay USD 495. Choose to repay after half time and end up at about 350 USD. They always apply an effective interest rate of 33.4%.
Above, some of the “cheaper quick loans” have been presented. Of course, there are those with significantly higher costs and effective interest rates. But in the debate on “high-cost credits” and “high effective interest rates” regarding different forms of loan, it is important not to leave the partial payment option completely out of the debate.
Here, customers should not be protected
As mentioned in the introduction, the proposal is that the limit for high-cost credit should be 30% + the applicable reference rate. If the law goes through, loans with effective interest rates at this level would be subject to a number of requirements and restrictions that the law regulates. But in all likelihood, it will only apply to loans.
The investigators do not want it to apply to credit purchases and during the referral round several referral bodies pointed out that it is good that this law should not include credit purchases. For example, Syen Haven writes that ” this type of credit differs significantly from the interbank loan, mainly because the consumer receives a product “
Several of the measures described in the new bill are about keeping down the total cost to the borrower. But any restriction on credit purchases should therefore not apply. In this way, companies can continue to offer partial payments with effective interest rates of over 60% without having to be limited by the law that (if implemented) will hit hard against other forms of lending.
Part payment is in some cases the best financial solution. This is in the same way that all loan forms have their advantages. As a borrower, on the other hand, you should always be aware of what you are actually paying.