But in the fine print:

From Consumerist David H.

I got this “pre-screened” loan offer a day or two ago and nearly fell off my chair when I got down to the fine print. It’s sad to think that people might actually take this offer!

Hey, I’ve often been in a situation where I needed a $357.10 loan at a low, low 29.980% APR!

I don’t get it: where does the $6,000.95 come from? Is it really a pre-screened offer, and so they know something about your income, and that’s what they figure you can offord?

Or does everybody get the same anmount, carefully chosen to look like it was calculated?

I thought at first the $.65 at the end might be there to make the interest come out to a nice even number. Like how some stores set their prices so that after tax it comes out to even money and they don’t have to deal with change.

But this clearly isn’t the case here as the total interest comes out to $5,643.85 which is a really strange number as well. It would have been cool if adjusted the loan amount so that the total interest came out to $5,432.10. Then it would at least make sense to have the extra change in there.

What ever happened to Usury laws?

The math figured in the Consumerist comment is incorrect. This is actually paying $11,644.80 for a $6,000.95 loan since those finance charges are ON TOP of the loan amount. A $357.10 loan at 29.98% would be substantially cheaper!

I’ll try posting this in a couple of parts, since it’s not working as a single comment…

Understanding how loans like this work is just plain good stuff to know (even though in this case the ripoffiness is pretty obvious), so here’s a quick tutorial. If you have any spreadsheet experience, you can set up your own amortization sheet and play with the variables. (It’s easy, MBA math, not that nasty engineering math.)

We’ll start with the HSBC offer:

Starting Loan Balance:

$6,000.95Monthly Rate (0.2998/12):

0.024983333Monthly Payment:

$194.0860 payments x $194.08 = $11,644.80 = 6,000.95 principal 5,643.85 finance charge.

Each payment you make is part finance charge and part repayment of the loan principal. (The finance charge part) is (the balance after the previous payment) times (the monthly rate), rounded to the nearest cent. (The principal part) is (the total monthly payment) minus (the finance charge part). (The new balance) is (the balance after the previous payment) minus (the principal part). [I hope you appreciate my weird hybrid of math and plain English.]

Let’s amortize, shall we?

- – - – | Fin. Chg. | Principal | New Balance

Pmt # 1 | 149.92 | 44.15 | 5956.79

Pmt # 2 | 148.82 | 45.26 | 5911.53

… and so on …

Pmt # 59 | 9.34 | 184.74 | 188.96

Pmt # 60 | 4.72 | 189.36 | -0.40

(The 40 cent overpayment at the end can be considered rounding error; note that one cent less per monthly payment and they would have come up short.)

The total of the 60 finance charge parts of the 60 payments is

$5,643.45; add the 40 cent rounding error and you get $5,643.85 as the HSBC offer states.~ ~ ~ ~ ~

To be continued…

…having trouble getting the next part to post…

I want to give an example with a lower rate now, but I can’t get it to post.

Well, I had it all nicely formatted like part one above, but since I can’t post that, I’ll just sumarize by saying:

1) With a 9.99 percent rate, leaving the monthly payment at $194.08, total finance charges are

$487.39. Compare that to $5,643.45 for the 29.98 percent loan. You are also done in 3 years (36 payments) instead of 5 years.2) With a 9.99 percent rate but reducing the monthly payment to $127.48 and paying over 60 months, the totals finance charges are

$1,647.32, a big increase over the $487.39 in the previous example, but still a huge savings over $5,643.45 for the 29.98 percent loan. And the monthly payment is 34 percent less.Ok, figured out the problem.

You can’t put a percent sign in a comment!

I had to use the word “percent.” I’ll fix part 2 and try posting again.

Now let’s consider two other possible scenarios using the same loan amount with a more reasonable 9.99 percent interest rate.

~ ~ ~ ~ ~

First we’ll leave the monthly payment unchanged:

Starting Loan Balance:

$6,000.95Monthly Rate (0.0999/12):

0.008325Monthly Payment:

$194.08- – - – | Fin. Chg. | Principal | New Balance

Pmt # 1 | 49.96 | 144.12 | 5856.83

Pmt # 2 | 48.76 | 145.32 | 5711.51

… and so on …

Pmt # 35 | 3.03 | 191.05 | 172.84

Pmt # 36 | 1.44 | 192.64 | -19.80

The total of the 36 finance charge parts of the 36 payments is

$487.39. Compare that to $5,643.45 for the 29.98 percent loan. You are also done in 3 years instead of 5.~ ~ ~ ~ ~

Last example: Same 9.99 percent interest rate, but we’ll reduce the size of the payment so it takes 60 months to pay off the loan:

Starting Loan Balance:

$6,000.95Monthly Rate (0.0999/12):

0.008325Monthly Payment:

$127.48- – - – | Fin. Chg. | Principal | New Balance

Pmt # 1 | 49.96 | 77.52 | 5923.43

Pmt # 2 | 49.31 | 78.17 | 5845.26

… and so on …

Pmt # 59 | 2.09 | 125.39 | 125.90

Pmt # 60 | 1.05 | 126.43 | -0.53

The total of the 60 finance charge parts of the 60 payments is

$1,647.32, a big increase over the $487.39 in the previous example, but still a huge savings over $5,643.45 for the 29.98 percent loan. And the monthly payment is 34 percent less.