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How Interest Works When Purchasing on Credit

Updated on September 23, 2014

Avoid Purchasing Consumer Goods on Credit

One of the easiest ways to avoid paying interest on purchases is to save up and pay cash for them instead of whipping out your credit card.
One of the easiest ways to avoid paying interest on purchases is to save up and pay cash for them instead of whipping out your credit card.

Are You Really Willing to Pay Triple Price?

These days, there is a plethora of loan options that have been made available to the public. While some of them are short term products such as payday loans, others can extend for as long as 30 years (home loans).

Financial institutions make it seem so easy to obtain credit. However, they usually neglect to inform you just how difficult and expensive it will be to repay these loans in full. Giving you the option of extending your loan period may make them sound like they are doing you a huge favor, but at the end of the extended loan term, they are the only ones who are benefiting from this extended arrangement.

One such loan offer arrived in my mailbox a few days ago, offering me "easy cash for whatever you need it for - immediate approval." The lending institution makes it sound so easy in that they will approve and give you the loan, and all you have to do in return is decide how many years of your life you are willing to sign away when you choose your repayment option.

Upon further investigation, however, I realized that the only people benefiting from this arrangement, would be the loan institution themselves, owing to the extremely exorbitant interest rates they are charging. While the stipulated rates may be deemed as legal, they are absolute daylight robbery. If you take the trouble t read the fine print when signing on the dotted line, you will realize that you are required to repay almost double (in some cases even triple) what you initially borrowed. Should you decide to extend your loan repayment period, you will probably have to consider hocking your false teeth and comic collection in order to cover the additional interest you will be paying.

In the small print (don't we just love how all the really important information is normally classified as "small print?"), it states that rates vary between 19% and 35% (compounded monthly), and that the repayment amount will also be subject to a monthly service fee. Just to drive the thumbscrews in even further, the fine print will also state that you will be required to pay a once-off initiation fee, which varies according to 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 according to the amount of money you borrow? In my honest opinion, this is just another way for lending and financial institutions to extricate a few more of your hard earned rands or dollars from your sweaty palm.

I don't know about you, but to me, this form of money borrowing is the fastest way to ensure that you pay twice or even thrice for whatever you may be taking the loan for, be it a car, or even for a holiday or anything else. So once again, this brings us to an extremely crucial question. Is the item or service that you are taking out the loan and effectively signing your life away for, really worth paying more than once for?

To me, this sure seems like you are paying for two items and only receiving one in return. It would be the same as going into your local Wal-Mart, putting a gallon of milk in your shopping cart and then being charged for two gallons when you reach the checkout. If this happens, most of us would certainly kick up one hell of a stink, so why do we find it acceptable to pay more than once for other items like clothing, shoes and gadgets?

In some cases, emergencies do occur, and as a result, a loan may need to be taken out in order to cover the cost. However, before simply signing on the dotted line, it is a good idea to consider shopping around for a loan that has more affordable interest rates. 99% of the time, you will be able to find a loan that is affordable and that will not penalize you if you are able to repay it earlier than anticipated.


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    • Shona Venter profile image

      Shona Venter 7 years ago from South Africa

      Thanks ripplemaker. These days, as people are watching their finances more and more, I felt that it was important to impart the knowledge I have regarding interest rates and how banks take advantage of people in need.

    • ripplemaker profile image

      Michelle Simtoco 7 years ago from Cebu, Philippines

      Such a useful hub!

      Congratulations! Join the Hubnuggets Adventure as your hub has been nominated in the Personal Finance Category! Vote, promote and enjoy the Hubnuggets!

      This way to the Hubnuggets:

    • Shona Venter profile image

      Shona Venter 7 years ago from South Africa

      Thanks thevoice. More people need to be made aware of just how much extra money they spend when lending money :-)

    • thevoice profile image

      thevoice 7 years ago from carthage ill

      terrific detailed high quality hub work thanks