Everybody knows that a loan is not a free bundle of money. Loans come with fees and interest, and you end up paying more than the original amount you received. The true cost of a loan can get confusing and expensive. Read how much a loan really costs.
That’s right, you will pay more for a loan than you borrowed
As a small business owner, you have probably had some experience with loans. Whether you’ve gotten a working capital loan for your business or have a credit card you’re making payments on, you have paid interest on money you borrowed. Despite how common credit is in our culture, we don’t sit down and think about how much interest we will actually pay over time.
If we take “8% fixed interest rate” for example, you might assume they will pay 8% of the amount of money they borrowed. Interest isn’t that simple. For each month you still owe money, you will pay 8% of how much is left over that month. Good news: the amount of interest accumulated each month will go down as you pay it off.
Certain types of loans can actually hurt your business
We talk a lot about how dangerous Merchant Cash Advances (MCAs) are for small businesses, but it is important to stay away from these. MCAs or payday loans take a percentage of your sales to pay off your debt. This sounds easier than putting away a large chunk of money to pay each month, but this hurts your cash flow. Additionally, you may end up paying up to 350% APR. Bad news: this means that your loan will get extremely expensive and will really hurt your small business.
APR is a good indicator of your loan’s true cost
Your Annual Percentage Rate (APR) is calculated using your monthly interest rate as well as all the fees and additional costs of a loan. This makes APR a good indicator of how much a loan costs you each year, but it can be misleading if you pay off your loan early.
A low monthly interest rate sounds good, but it is important to be aware of any other fees that add up. Your lending institution may have early repayment fees, late payment fees, collateral collection fees, origination fees for simply getting the loan, check processing fees, and many more hidden costs! Always read the fine print closely.
Know the difference between fixed and adjustable APR. If your interest rates change, this could be bad if the economy suffers. This article by Investopedia will explain APR in more depth.
Choose a trustworthy lender
The best way to avoid an expensive loan is to educate yourself and choose a lender who is trustworthy. Opportunity Fund is transparent about fees, interest rates, and how much a loan will really cost you. Check out this easy-to-use loan calculator to find out your APR and monthly payments.
For information about Opportunity Fund’s small business loans, please contact us at 866-299-8173 or firstname.lastname@example.org. For questions about your existing loan or other customer service questions, please contact us at 866-299-8173 or email@example.com.
Opportunity Fund is tackling economic inequality so that hard work and perseverance means a shot at getting ahead, not just struggling to get by. Our programs are supported by a community of donors and investors whose contributions help to fund small businesses, support college students, and build stronger families and vibrant neighborhoods. Since 1994, the team has deployed $600 million and helped 20,000 families earn, save and invest in their own futures. Opportunity Fund has earned a 4-star rating from Charity Navigator, America’s largest independent charity evaluator, for our commitment to accountability and transparency.
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