Kathy Sweedler from the U of I extension office economics department stops by the Morning Show for this week’s Your Money is discussing different lending and borrowing options.
Borrowing money can allow us to enjoy products and services today and pay for them tomorrow. Sometimes this can be to our advantage in the long-term, and sometimes not. We need to understand the costs of borrowing money and compare loan sources before signing a loan contract
Lenders can be everyone from your relatives, to your bank or credit union, to the U.S. government (student loans) to a car title loan company.
It’s confusing to compare loans with different repayment periods and fees. The annual percentage rate (APR) is a helpful tool you can use to compare loans.
The law requires that every loan, no matter for how long, be stated in terms of the APR. This tells you the cost of the loan on an annual basis. You can compare the cost of different loans by comparing APRs.
The loan with the lower APR is the less expensive loan.
Annual percentage rates vary by geographical location, the current economy, and lender – even for the same type of loan. However, here are some “ballpark” rates for discussion:
Family/friends: 0% – ?
Car loan: 3%
Mortgage loan: 4%
Credit cards: 10-25%
Vehicle title loans: 200-300%
Reports from Illinois Asset Building Group and the Consumer Financial Protection Bureau found that consumers have trouble with car title loans. One out of five borrowers ended up losing their vehicles.