We frequently get feedback from our customers. One aspect often cited is that the interest rates can sound awfully high.*
Here’s something that might surprise you:
Some borrowers think our interest rates are too high. According to some of our affiliates, those borrowers may take out a loan at a higher interest rate than what they were quoted with LoanMe.
How could this happen? It’s common for business owners to encounter some confusion about the way interest rates are stated.
LoanMe Reports Vs. Short Term Business Lender Interest Rates
Here at LoanMe, we have a 100% commitment to transparency in lending. Part of that commitment means quoting interest rates. Disclosure of interest rates is a key differentiator between LoanMe and some other lenders.
According to this article in Forbes:
For example, one lender may loan a business $10,000 with a monthly payment of $2,000. “People who don’t understand math will say, ‘$2,000 times six is $12,000. I get $10,000, so that’s 20% interest.’ No, you only have the money for six months. Therefore, you have to double it. Because APRs are for 12 months. This was only for six months, so now 20% interest is 40%,” he says. “Oh wait, there’s more. They didn’t lend you $10,000 for six months. They start taking the money back from you right away,” he says, referring to the fairly common practice of requiring payments immediately, as OnDeck and many others do. “So you didn’t own $10,000 the whole time, so double it again. Now you’re at 80% or so — 76%.”
This is a key difference to take note of when comparing loans.
As stated in the Forbes article above, often business loans in the marketplace are quoted not as an APR, but as “for every dollar borrowed you pay back X.”
For example, consider a 6-month merchant cash advance or other daily payment loan product. A common rate quoted for these products is 1.25. So, in the above example, for every dollar borrowed you would pay back $1.25.
It’s common for borrowers to conclude this means they’re being offered a 25% interest rate. If converted into an interest rate, one could compare this product on an apples-to-apples basis with other products in the market place.
What Are LoanMe’s Interest Rates?
Our products have a wide range of rates and terms to cover a variety of risk profiles. For high-risk borrower profiles, one could consider the interest rates to be high relative to a bank loan. Generally speaking, our products carry rates many would consider to be reasonable.
Our products have annual interest rates ranging from 14.90% to 149% (interest rates vary by state, product and credit profiles).
The interest rates your business might be quoted depend on risk factors such as:
- How long a company has been operating
- The owner(s) personal credit scores
- Business liquidity and cash flows
The truth is, determining if rates on a loan offer are ” high” or moderate comes down to a comparison against other available offers.
Let’s take a look at some of LoanMe’s product tiers versus a typical short-term lending option. Bear in mind, shorter-term loans are quoted as a daily payment, which can make it difficult at first glance to convert to a monthly payment.
Generally, six month daily payment advances have 125 payment days. Here’s a way to convert the loan to a monthly payment: Divide 125 by 6 to get 20.833 days per month. All it takes then is to multiply the daily payment amount by 20.833 to convert into a monthly payment.
Let’s examine a $15,000 loan: The typical 6-month option with a 1.25 factor would result in payback of $18,750. Again, if you divide that number by 125 you get a daily payment amount of $150. That translates into $3,124.95 per month.
Notice that on LoanMe’s highest rate tier, your minimum monthly payments are still significantly lower than the typical working capital product. On the lower rate tiers, the payments are a fraction of what you would pay with a daily payment loan.
Can a fair comparison be made between a 6-month loan and a 10-year loan? Yes, especially when it comes to your money.
There are two things to bear in mind:
- The payments on short-term loans are so high that many business owners need to renew them over and over again, never breaking the high payment/ high debt cycle.
- You may pay a LoanMe loan off early with no prepayment penalties.
For example, research into one cash advance lender’s portfolio revealed that the average borrower renewed 3.1 times over 31.9 months. This highlights that these “short-term” loans are tend not to be really short term in nature.
It’s important to be able to compare loan offers on an “apples-to-apples” basis. Often, if the true costs of available funds are examined side-by-side, our customers find LoanMe to be the least expensive choice.
*This article has been prepared for general information purposes only. The information presented is not legal, financial, tax or accounting advice, is not to be acted on as such, and is subject to change without notice. Credit approval is subject to LoanMe’s credit standards, and actual terms (including actual loan amount) may vary by applicant. LoanMe requires certain supporting documentation with each new application. If you have any questions regarding this, call us at 844-311–2274. California loans are made pursuant to LoanMe’s California Department of Business Oversight Finance Lenders Law License #603K061. LoanMe also offers loans in certain other states which may have higher minimum loan amounts. Copyright © 2016 LoanMe, Inc. All rights reserved.