Saturday, August 23, 2008

transaction fees

Getting best deals from credit card checks. One of the important things that you can get with a credit card is a loan, by using the checks they send you from time to time. One way you test whether it's a good loan or not is by its initial cost, the transaction fee. Then you have to compare whether the initial cost and the APR together are less than other ways that you could get money.

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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