Annual Interest Rates
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On every credit card disclosure, the term "annual interest rates" is displayed somewhere on the page. In order to keep from heart attacks occurring when the disclosure is read, the words are often in very small letters. The words also appear on auto loan paperwork, mortgage loan contracts, and any other document as well as in banks which advertise savings account interest. But if one looks closely at the details of a disclosure notice, the annual percentage rates may not be the actual cost of the loan. It's all legal and the teaser rates are not in any way lies, they just don't tell the whole story. However legal, the posted cost of borrowed money can often lead a person to the belief that it's a rate he can live with, when in reality the cost is much higher.
Let's start with the words annual interest rates. This is a term that describes the base line cost of borrowed money figured on a twelve month basis. Annual interest rates are also often called nominal interest rates and are always the numbers posted for any advertisement regarding loans for any kind of purchase. These are the comforting numbers, the ones that tell a person that this lending agreement is going to be a good deal, a chance to bring home that new car, that big screen TV or that carpet that is sorely needed. So lie back and just bask in the warmth of that seventeen percent credit card APR as it is so fondly referred to on the store counter advertisement. This is going to be Phat City.
But off in the distance a thundering herd can be felt as the horde pounds away at the road coming right at the consumer. First it was the cloud of dust but soon the earth is shaking and as soon as the consumer gets home and really reads the lending agreement contract on the plasma TV, he will be run over by the quite happy and delighted creditors who foist the dreaded effective annual interest rates on that quite naive consumer. Sadly, all he wanted to do was watch the Cowboys play on Sundays and count the field grass blades on that unbelievable picture, but instead is crying over the real cost of the purchase just made. Annual interest rates have effectively trapped another consumer in its dastardly web. While so many religious people try and jam their brand of religion down others' throats, Jesus just quietly goes about being fair and balanced about His approach to each person's life. He said, "Behold, I stand and the door and knock: if any man hear my voice and open the door, I will come in to him and will sup with him, and he with me." (Revelation 3:20)
The effective APRs are the bottom line, gasp at the numbers, and get the heart medicine out reality of any loan. Our buddy who likes the Cowboys has bought a plasma TV plus a surround sound theater system for seven thousand dollars. He opens a charge card account with the electronics store which has an annual percentage rate of twenty seven percent. But the effective annual interest rate is 30.98% because the cost of the loan is compounded daily on the balance. The amount he figured in the store to pay it off in five years and the actual amount was seven and thirty five dollars more. There went the sale price savings of the home theater system. If the guy takes the loan out to ten years, the effective rate will actually be fifteen hundred dollars more than the annual interest rates advertised on the store counter.
Fifteen hundred dollars over ten years may not be thundering herd stuff to the reader, but to our Cowboys loving fan, making eleven dollars an hour as an auto lot attendant that's almost a tenth of one year's net income and seventy dollars more a month in payments. And if our young lot attendant doesn't watch himself with the monthly payments and get them in on time, the annual interest rates will climb on all his loans that he might have. Annual percentage rates for loans on the same items or credit cards are not equal among all consumers. They are all contingent on someone's FICO scores which can change on a regular basis. With a few late payments, some added new debt, and other factors, the APR and its effective rate counterpart can change dramatically. Add this to the annoying habit of credit card companies changing due monthly payment due dates willy-nilly and there become a number of circumstances affecting all of our financial situations.
Probably the biggest thing to remember with annual interest rates is the fact that they are not what they appear. This leads to the observation that one of the things that have hurt the lower and middle classes over the past twenty five years is the practice of usury, or high interest rates on borrowed money. When loans were given out of necessity rather than out of the desire for luxury items, lenders were chastised by the church if any hint of usury was suspected. But today, there appears to be no conscience regarding the practice of charging thirty percent or more on credit card or unsecured debt. It is the attempt to stay above water with minimum payments on this unsecured high interest debt that has driven lower and middle class Americans to the reality of living paycheck to paycheck.
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