You may have seen the media trumpeting out that the loans are covered by interest rates of several hundred or several thousand percent. When they write in the newspaper that a sms loan has an interest rate of 200%, for example, many put their coffee in the throat because they think you have to pay back twice as much as you have borrowed in interest, but that is not at all. It is totally misleading.
Therefore, the effective interest rate is misleading
In fact, talking about effective interest rates when it comes to sms loans that have a repayment period of 1 – 3 months is quite fitting. The effective interest rate shows how high the interest rate is for a loan for a full year, including all fees, not how much a sms loan that is put up in 1-3 months really costs. Astro Finance should give you an example.
A loan of USD 1,000, which is arranged over 30 days at TotalLend Credit, has an effective interest rate of 218.9% for former customers (new customers can borrow free of charge). This does not mean that the loan has a loan cost of USD 2189 ( USD 2,189 x 1000) but it only costs USD 100, which is 10% of USD 1000. The monthly interest rate is thus only 10%, although the effective interest rate is 218.9%.
The thing is that you would have had to pay 218.9% in interest if you had borrowed money for 12 months and then the loan cost would have been USD 2189 if you repaid everything at once, but the fact is that you actually only borrow for one month and then it won’t be terribly expensive.
Talking about the effective interest rate with regard to one-month mortgages is like basing the effective interest rate on 120 years when you take a 10-year private loan and then the interest rate would look really high, we can promise.
Better to talk about loan cost
But of course it is good that the lenders specify their effective interest rate because it makes it easier for you to compare sms loans, but on the other hand Astro Finance thinks it is more important to look at the loan cost instead. If you consider that a sms loan that can be put up in a few years, you will see that such loans often have an effective interest rate around 30% while short loans have an interest rate of several hundred percent, but in the end you may still be able to pay the same a lot for the loans. That is why the effective interest rate can be a bit misleading when it comes to sms loans.