I was recently in a hotel in Las Vegas for a trade show. I went to the ATM machine in the lobby to grab a few bucks before heading to dinner. I selected $20 and was shocked when asked if I approved of a $7.50 charge from the originating bank. I decided to get $100 instead and left the lobby chuckling.
If one were to calculate my Vdara ATM transaction, it would be, well let’s see… $7.50 is roughly 33% of the $20 I originally wanted, which if you “annualize,” you must times this number by 365 days. The interest rate? Over 12,000%.
Banks love this kind of interest of course. It’s basically paid up front and gives them these kinds of returns, not for lending money, but for giving you your own money!
Any bank advertizing “low rates” enjoys fees and penalties revenue that yields very profitable returns.
I certainly don’t blame the banks. I’m happy for them to be able to make money. There’s clearly still a need for banks. Once customers don’t feel there’s a need for them, banks will adapt or will go out of business. Such is the beauty of America and the free market system.
Like my decision to increase my amount of money at the ATM machine to “justify” the $7.50, customers accessing credit online make similar decisions.
Customers at ExtraFunds for example may seek a loan to avoid more costly NSF charges, or to make an important repair that just can’t wait. Many of our customers are paid daily or hourly and so missing a day at work is a lot worse than paying what is perceived as a high interest rate on an installment loan.
Most borrowers, despite what some people may think, are just like most people. We are intelligent and know what our financial needs are. Does this mean some of us don’t make foolish financial decisions? Or experience setbacks? Of course not. But, most people are just doing the best they can to keep things together and are weighing the costs of credit.
Whether rich or poor, most people have a need along the way to borrow money. My first loan was a 36% interest credit card to start a small business. The loan was for $300. It was my first lesson that “interest rate” doesn’t always mean what you might think. Cash advance fees, late fees and penalties, monthly and yearly account charges, all added up.
Nonetheless, I weighed the costs and adjusted my plan and was able to make good use of my first loan. Even today, if I buy a property I might use an interest only loan. It just depends on the circumstances. Money saved on a monthly payment, might be more money made if your money is working for you elsewhere.
We always encourage our borrowers to pay off their loans we service through ExtraFunds as quickly as possible. Annualizing the interest rate only makes sense if your loan lasts for a year. We hope your loan only lasts a few weeks. Then it’s simply like an ATM fee that even if it’s a little higher than we’d all like, still might make a lot of sense.