loan trickery

I have this “American Express Blueprint Business Loan” product to have a line of credit for the rentals if I’m ever in a pinch.

They allow up to $21,700 with this very easy application process, you basically just slide a slider to the amount needed & select between 6, 12, 18, 24 months:

This shows a schedule like this:

Looking at this, there’s a lot of temptation to think

0.5% per month, that’s like 6% per year, plus maybe a bit more for compounding? what a great rate!

And a 6% APR would be a very tempting proposition – hell, it’s cheaper than my commercial building loan @ 7.5%!

But there’s a trick. Maybe you’ve already spotted it; if you haven’t, can you?

They charge the 0.5% on the original balance each month, even as you pay it off!

To see the difference, compare

INSTALLMENT LOAN
    Balance	  FEE	(%)       Principal	Total
1	$27,100	  $136 (0.50%)	   $4,517	  $4,652
2	$22,583	  $136 (0.50%)	   $4,517	  $4,652
3	$18,067	  $136 (0.50%)	   $4,517	  $4,652
4	$13,550	  $136 (0.50%)	   $4,517	  $4,652
5	$9,033	  $136 (0.50%)	   $4,517	  $4,652
6	$4,517	  $136 (0.50%)	   $4,517	  $4,652
		        $813          $27,100	 $27,913

vs

FULLY AMORTIZING LOAN @ 6%
    Balance	  Interest  Principal	Total
1	$27,100	    $136	   $4,461	  $4,596
2	$22,639	    $113	   $4,483	  $4,596
3	$18,157	     $91	   $4,505	  $4,596
4	$13,651	     $68	   $4,528	  $4,596
5	$9,124	     $46	   $4,550	  $4,596
6	$4,573	     $23	   $4,573	  $4,596
		        $476	  $27,100	 $27,576

As you can see, the total fee is $813 instead of the $476 in total interest, 71% additional cost! This makes the loan very different from a 6% APR, more like a 10.2% APR!

FULLY AMORTIZING LOAN @ 10.21%
    Balance	  Interest  Principal	Total
1	$27,100	    $231	   $4,422	  $4,652
2	$22,678	    $193	   $4,459	  $4,652
3	$18,219	    $155	   $4,497	  $4,652
4	$13,722	    $117	   $4,535	  $4,652
5	$9,187	     $78	   $4,574	  $4,652
6	$4,613	     $39	   $4,613	  $4,652
		        $813	  $27,100	 $27,913

The BluePrint installment loans are structured that once you pay off the balance, you no longer pay the fee. So if we calculate the interest cost of the actual 6% APR loan, we can figure out how many payments we should make to make the installment loan cost the same. In the case of a 6mo, 6% APR loan, we’d pay $476/mo in interest, so we can make 3 payments before the total of the $136/mo fees exceeds that amount. BUT the catch is then that we have to make a $9169 payment every month!

INSTALLMENT LOAN WITH EARLY PAYOFF:
    Balance	  FEE	(%)   Principal	Total
1	$27,100	  $136 (0.50%)	    $9,033	  $9,169
2	$18,067	  $136 (0.50%)	    $9,033	  $9,169
3	$9,033	  $136 (0.50%)	    $9,033	  $9,169
4	$0	      $0        	      $0	      $0
5	$0	      $0        	      $0	      $0
6	$0	      $0        	      $0	      $0
              $407        	   $27,100	 $27,507

Reflecting a bit on this whole exercise: I’m a bit embarrassed to have fallen for the trickery here. I’ve worked for financial technologies companies for a decade, I’m a math nerd (and PhD holder!), and I’ve used debt extensively to build a business and considered myself pretty savvy. Despite the fees being very clear and not calling it a “rate” and everything being spelled out, this feels like trickery – they’re making it a very tempting mental leap to consider it a rate and think you’re comparing apples to apples, when clearly you’re not.

This is exactly the same as the car financing sales trick, where they give you the illusion of choice (and having negotiated!) by presenting several different monthly payment options and letting you pick one. And in the case of Amex Blueprint, nobody could say they aren’t upfront about what the costs will be – it’s all there in black and white.