When you have a need to take on debt,
it is important to find the
most attractive terms you
can.You do not want to pay higher
interest than necessary or pay fees
that could have been avoided by shopping around.
Comparing Credit Cards
Credit cards offer a variety
of interest rates, terms and
features. Two cards, both with the
same name, may offer very different
features. Each financial institution
that offers credit cards establishes
its own terms.
Be cautious of credit cards that
start charging interest
on items you buy the day each
transaction is posted to your account.
You pay interest on all purchases
with this type of card.
Compare credit card options carefully and
consider the following.
- Annual percentage
rate (APR), or the rate of interest
you will pay annually.
- Fees charged by the
card issuer, such as over-limit fees,
annual fees or cash advance fees.
- Grace period or the
amount of time you have to pay before
interest is charged.
- Other benefits, such
as frequent flyer miles or access to
an automated teller machine (ATM).
- Penalty APRs that
increase your interest rate if
you are late on a payment.
Comparing Loans
Like credit cards, loans vary
depending on the institutions offering them.
When shopping for a loan, compare the following.
- Annual percentage rate (APR),
or the rate of interest you will pay annually.
- Length of the loan, which
affects the total amount of interest you
will pay.
- Service reputation of the lender.
When deciding on a loan,
it is easy to commit to a large
long-term debt when a low monthly payment
looks advantageous. Before you do,
compare the total amount of interest
over the entire life of the loan.
Remember, you pay more total interest
when you select a longer-term loan.
Be sure to ask questions and
read the contract carefully before
you sign.
The table below illustrates
how total costs can vary among
loans in which there is only a
modest variation in the APR and
the length of the loan.
| Comparison Shopping For Loans |
| |
Amount
Of Loan |
APR |
Length
Of Loan |
Monthly
Payment |
Total
Interest |
Total
Cost |
| Loan A |
$12,000 |
7.5% |
3 years |
$373.27 |
$1,437.91 |
$13,437.91 |
| Loan B |
$12,000 |
8.5% |
3 years |
$378.81 |
$1,637.18 |
$13,637.18 |
| Loan C |
$12,000 |
7.5% |
4 years |
$290.15 |
$1,927.03 |
$13,927.03 |
| Loan D |
$12,000 |
8.5% |
4 years |
$295.78 |
$2,197.40 |
$14,197.40 |
How would you evaluate these
loan options?
- Loan A offers the lowest total interest.
- Loan C charges the same interest
rate as Loan A, but paying over 4
years rather than 3 years adds almost
$489.12 in total interest.
- Loan C charges a lower
interest rate than Loan B, but
Loan C’s longer term still
results in a higher total cost.
- Loan D’s 8.5 percent
interest rate results in $270.37 more
in interest paid than with Loan C,
even though there is only a small
difference in monthly payments.
If you can afford the
monthly payments, choosing Loan A
over Loan D would save you $759.49
in total interest paid over
the life of the loan.
|
Basic Money Management
Basic Money Management
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