Assume you are going to get a zero percent APR loan and your transaction fee is 3%. That 0% APR looks enticing, doesn't it? Did you know this is the same as getting a 6% APR loan with no transaction fee? Your zero percent APR just went to 6%. How?
Assume you borrow $1200.00 and you pay twelve payments of $100 each to pay off the zero percent loan. Your total finance charge is your 3% transaction fee times $1200, or $36.00.
Now, assume you pay 0% transaction fee and 3% APR. Each month you pay 0.03/12 times the current balance (dividing by 12 changes an APR to a monthly interest amount). You can put it into a spreadsheet and figure it to the penny, but let's assume your monthly payment is $100 plus the current interest. Your average balance for the year is one half the original amount, or $600. Multiplying the average balance by the APR gives the approximate interest for the entire year, $600 * 0.03 = $18.00.
When you paid a fee plus 0%, your total finance charge was $36. When you paid 3% APR, you paid $18. Which was the better deal?
Paying a percentage fee at the front of a loan effectively doubles the finance charge, assuming a one year payout.
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