Understanding Interest and Fees | Money Management | Exodus Lending

By Kaitlyn Szabo • August 26, 2019

Interest and fees, in their simplest terms, are the cost of using somebody else’s money. Thus, the borrower will repay more (within reason) than they originally borrowed.

Interest

The interest rate is the cost of borrowing the principal amount. An annual percentage rate (APR) is the interest rate plus additional charges and fees. Thus, the APR is the effective annual interest rate. Learn more about the difference between interest rates and APRs, plus how to calculate APR for various debts with these resources from the Balance.

The Truth in Lending Act requires lenders to disclose the APR, term of the loan, and the total costs to borrow in a visible, noticeable way. Here are some examples of a disclosure box for $500 payday loans.

(We consider loans with more than 36% APR predatory. Both these examples definitely meet that criteria.)

Example 1:

APR	FINANCE CHARGE	AMOUNT FINANCED	TOTAL OF PAYMENTS
Cost of your credit as a yearly rate is	Amount your credit will cost you.	Amount of credit provided to you or on your behalf	Total amount you will have paid after you have made the scheduled payment(s)
142.81%	$31.30	$500	$531.30

Example 2:

APR	FINANCE CHARGE	AMOUNT FINANCED	TOTAL OF PAYMENTS
Cost of your credit as a yearly rate is	Amount your credit will cost you	Amount of credit provided to you or on your behalf	Total amount you will have paid after you have made the scheduled payment(s)
865.71%	$1,425	$500	$1,925

Fees

You may be charged additional fees when you borrow money, or even for managing your funds through your financial institution. Here are some examples of typical fees and ways to minimize them or avoid them altogether.

Example 1: Monthly maintenance fees or minimum balance fees

Research institutions that offer free checking accounts or ones with no minimum balance requirement.
Ask about fee waivers. Many banks or credit unions waive fees for customers who set up direct deposit, sign up for paperless statements, or use other services.

Example 2: Overdraft and non-sufficient funds (NSF) fees

Set up alerts for when your account reaches a specific balance, like $100, to ensure you aren’t spending more than you have available.
Opt-out of the overdraft service. You won’t get the fee, but your bank will decline the transaction or withdrawal if it exceeds your balance.

Check out Consumer Reports’ tips on how to avoid bank fees and how to protect yourself from hidden charges.

Looking for an affordable banking option?

FAIR Financial Solution products are designed to help people achieve financial health and wealth, including:

Checking accounts with no account overdraft fees and low monthly fees
Savings accounts with no monthly minimum balance requirement
Credit Builder products with no credit score requirement to get started

Money Management E-Newsletter: July 2019