Are all sms loans dangerous? How do sms differ from each other? What are the biggest risks? Are there cheap sms loans? This article gives most answers. The change in the law on September 1, 2018 means a 40% interest rate ceiling, which means that the most aggressive loan form discussed on this page – the short-term sms loan and its extension fees – will be completely eliminated.
A follow-up post explaining how lenders try to make the most out of borrowers by converting their loan products into account credits.
“A sms loan is always the worst option!”
There is no clear definition of “sms loans”. When the media writes about the industry, companies that offer unsecured loans are often referred to as sms loans without making a difference between loan sizes or arrangements. A variety of loan products therefore fall into the same category.
You are happy to choose a loan with aggressive structure and a high effective interest rate, and then attack all lenders who offer small amounts on these grounds. Here are two product examples that show the differences between different designs.
The loan has a built-in installment plan
That uses annuity and can be set up for 1 year or more. The loan is amortized over the entire term, leading to reduced monthly interest expense over time. The effective interest rate is comparatively high if you compare with a larger private loan. However, the loan has no set-up fee, which means that the loan is better suited for short maturities and quick payments.
Fig. 1 below shows that a loan of SEK 10000 will be approximately 50% cheaper if you choose Good Cash instead of SEB, provided that you repay within one month. If you pay back within 2 months it will be about 20% cheaper. Only after 3 months is SEB cheaper due to the lower annual interest rate.
SEB: Annuity loan with 1 year maturity. Loan amount SEK 10,000, annual interest rate 12.28% and planning fee SEK 300 gives effective interest rate 19.07%.
Good Cash: Annuity loan with 1 year maturity. Loan amount SEK 10,000, annual interest rate 25.75% without other costs gives an effective interest rate of 29%.
A sms loan that uses short maturities
And has a high effective interest rate can be more problematic. The loan is often scheduled for 30 days and usually has a higher ordinary price than the loan in the previous example.
Fig. 1.2 below shows an example of a sms loan where the cost of borrowing SEK 10,000 for 30 days is SEK 1500 (effective interest 446.77%). The benefits of the loan are fast payment, that payment remarks do not always give automatic rejection and that the loan can be paid out at short notice both in the evenings and weekends. New customers are sometimes offered interest-free loans for 30 days and it is possible to borrow without UC. You have the best chance of getting your loan application approved if you choose this type of loan, but the risk is even greater.
If you cannot afford to repay, the solution is to extend the loan. A pure interest expense.
The red line is the lender Good Cash from the previous example. In comparison, Good Cash is a much less risky loan. But it is also not as many loans that are approved, no loans are paid during evenings and weekends, no interest-free loans are offered and you can neither have a payment note nor borrow without UC.
Can product example 2 be defended? One argument in this case could be that the terms clearly state that the maturity is exactly 30 days. Although product example 2 is by no means a cheap loan, it is also not as bad as the effective interest rate gives off – if you pay off on time . Effective interest rates are based on years and the shorter maturities we expect, the faster the effective interest rate will increase in relation to the cost. The example “It will be 3.5 billion percent effective interest rate, thank you! Or should we say 100 bucks? ”Explains the problem.
However, there is no reason not to allow high effective interest rates to create a higher risk.
Journalists – do they even try to understand the problem?
You have just seen that loan products can look completely different. In the media, fast-loan companies are attacked in much the same way, no matter what their arrangement. Different loan products are compared to each other and the comparisons are often angled to make the quick loan look as bad as possible.
An example is Expressen’s sawing of Cash Buddy. Cash Buddy is a company with a fairly healthy arrangement on its loans and is similar to product example 1 above. The effective interest rate is 33.40%.
In the article, the journalist chooses to compare the largest amount of Cash Buddy with the bank’s prices: “When Expressen contacts Swedbank and SEB, it becomes clear that interest rates are significantly lower. For a loan of SEK 25,000 a year, for example, Swedbank charges 8.25 percent in effective interest rates.”
I choose to rely on the journalist’s job. If we borrow SEK 25,000 with the interest rate stated by the journalist, this means that the annual interest rate must be 6.15%, since the effective interest rate was 8.25% and because Swedbank has a planning fee of SEK 300 and because the loan is an annuity loan.
There is nothing to talk about. Clearly Swedbank is getting cheaper. The question is most often if you have time to wait for the money? But, quick loans are associated with small loan amounts so why do we count on big loans? Why do we discuss amounts of SEK 25,000 when the most common loan amount is SEK 5000?
Why do we compare fast loans on the bank’s terms if there are small amounts that customers are mainly looking for?
I mentioned earlier that interest rates increase with smaller amounts
The interest rate we used for Swedbank in Fig. 1.4. the annual interest rate was 6.15% and the effective interest rate 8.25% for the loan amount was SEK 30,000. But, now we are talking about a loan size 1/6 of the original amount: SEK 5000. I do not think that we are unfair if we in any case apply Swedbank’s highest annual interest rate, which they themselves set at 13% to make the next comparison.
Fig. 1.6 below shows the accumulated cost of a SEK 5,000 annuity loan with a 1 year maturity where Swedbank’s annual interest rate has been adjusted to 13%. The fast loan suddenly becomes cheaper for a whole five months when you count on the loan amount that visitors are actually looking for:
It is still possible that I have been too generous with that interest rate setting. Why do you think banks do not offer small amounts? Maybe because they are already earning massive sums on large sums and think it is better to stay away from the criticism that arises if they offer small sums and thus have to use a high effective interest rate? It would not have looked better if the bank managed the business.
How do you most easily limit the problems with sms loans?
As you saw in Product Example 2, you can sometimes choose to extend a loan instead of repaying the full loan amount. People who are not knowledgeable about loans may easily find that the extension fee is not that expensive to avoid repaying, but if you compare what it costs to put the loan on for a longer term and with a repayment plan right from the start simply the difference over time.
Fig. 2 below shows the accumulated cost over a one-year period for an extended loan and an annuity loan taken up with a one-year maturity. Both loans have the same annual interest rate. The loan amount in the example is SEK 5000 and the annual interest rate is 126.17%.
One could easily limit some of the problems with sms loans by putting up the loan on longer maturities with annuity right from the start. Even without an interest rate cut, it is a fairly clear limitation of the costs that arise if the borrower needs more time. There is one thing that is good about extensions: if they are not used too aggressively and abused by the companies, an extension can be a better alternative than sending the case to Kronofogden. Fig. 2 above shows that the costs of the annuity loan and the sms loan which are extended are followed for 3 months. Perhaps it would therefore be appropriate with 2 pieces. extensions but after that the company becomes obliged to draw up a installment plan? Simpler: as I said, make an annuity loan with 1 year maturity from the beginning.