SMS loans have become very popular in recent years. This is not very strange considering that it is very easy to apply for an SMS loan plus it can often help as a quick solution to a problem that arises. Access to the Internet and a mobile phone is often required. The requirements that are imposed on you who are applying for a loan are then often not very high, but most people can get a loan. Which is both positive and negative.
Because it is so easy to get a loan, it is important that you keep track of what is needed to avoid unnecessary risks, because it is the case that you are the borrower who takes the big risk. Here we will therefore discuss how it works with SMS loans and effective interest rates and what we think this measure is suitable for and when it does not work as well.
What is the effective interest rate?
Effective interest rates are a measure often used to say how expensive a loan is. What distinguishes effective interest rates and ordinary loan rates is that in the effective interest rate all costs are taken into account.
This means that interest, set-up fee, management fee or any other cost that comes with the loan are included. The effective interest rate is then presented with a figure based on an annual basis.
Effective interest rate something good for SMS loans?
It is a bit both and if it is appropriate to look at the effective interest rate when you obtain a loan of this type. The problem is that the interest rate is calculated on a full year basis, while these small loans normally only have a maturity of one to three months. This means that the effective interest rate can often end up at extremely high levels. Over 1,000% is not uncommon.
However, loans that have a maturity of more than one year are very suitable to compare by looking at the effective interest rate because they always get a fair level. What you can’t do is compare a private loan or mortgage with an SMS loan if you just look at the effective interest rate. Effective interest rates are thus a very good way of comparing loans only that they do not really work for the smaller and short-term loans.
It is possible to use effective interest rates
To compare different SMS loans with each other, all of which have a maturity of exactly the same time. Then you can see which SMS loan has the lowest effective interest rate, that loan will also be the cheapest. Although it can be difficult to get a good idea of how expensive the loan really is, you can easily decide which of two loans is the cheapest.
Otherwise, to decide whether to apply for a loan or not, our tip is that you do not really look at the effective interest rate, but simply think about whether it is worth paying the cost stated for the loan. The loan institutions always print what it costs and this figure is more interesting than the effective interest rate. It is much easier to decide if you want to borrow if it costs X USD than any easily abstract effective interest rate figure.