Credit Card Finance Charges – Installment Credit By Another Name

In the old days of commercial lending and in the early days of personal lending, most loans were single payment loans. Under this plan, it is customary to borrow a sum of money for a period of time… say six months or a year. At the end of the period the usual loan agreement the borrower would repay the amount of the loan plus (APR) interest figured at a stated rate per year.

For example, if a person borrowed $5000 at 6 per cent and repaid the loan at the end of the year, the interest charge would be $300 ($5000 x .06). However, if the loan was repaid at the end of six months the interest payment would be $150 because the borrower would be charged only for the time that he had the money. Credit cards and many “home equity loans” or HELC (Home Equity Line of Credit) operate somewhat like this today. You could say that paying credit charges is like paying rent on a house – you pay for the use of money for a certain period of time.

That changed as many borrowers had trouble saving up enough cash to repay a single-payment loan when it falls due, so installment credit plans – basically Credit Cards were invented as a convenience service – convenience disguised as benefiting both lenders and borrowers, when in fact if benefits the lenders!

Lenders charge for this service in different ways – purchases, cash advances, balance transfers, etc. This is where the confusion begins when you try to compare costs of any kind of plans involving installment credit.

Make sure you read and understand the fine print of any loan and especially your credit card application before signing and agreeing to the terms and conditions.