What It Really Costs

Credit counselors invariably bewail the willingness of consumers to take the first time-payment deal they are offered --and with good reason. To test the benefits of shopping around, TIME staffers in New England, the Midwest and the California-Nevada area asked various lenders what terms they would.offer to a salesman who earned $20,000 a year and wanted to borrow $2,000 to take his wife and two children on a vacation. The salesman was assumed to be making mortgage payments on a $40,000 house, and to be paying $110 a month on an auto loan and $50 a month on department-store charge accounts. Conclusion: he would pay anything from 1% to 22% effective annual interest on his vacation loan if he turned to legitimate creditors, 55% for ten weeks if he sought out a Las Vegas loan shark (borrow $2,000, repay $3,100--or else).

The lowest rate was offered by a Pasadena savings and loan. If the salesman had $2,000 or more in a savings account, he could borrow on his passbook and pay 1 % more in interest on his loan than he received in interest on his savings. The high-end 22% rate was quoted by a finance company in Los Angeles. Some rates in between:

LIFE INSURERS would lend the money at 5% to 8% interest annually, if the salesman had built up a cash value of $2,000 or more in a policy. Since he would in effect be borrowing his own money, he could repay the principal whenever he felt like it, or not at all. In that case the $2,000 would be deducted from the proceeds paid to his beneficiaries when he died.

CREDIT UNIONS would generally lend to a salesman-member at 12% annually. But if he belonged to Polaroid Corp.'s credit union, an annual refund of interest would reduce the real rate to 9.6%. Payments: about $80 a month for three years. BANKS offered strikingly varied terms on a straight installment loan. In Boston, National Shawmut Bank would lend at 14% per year for 24 months (monthly payment: $96.02). First National Bank of Boston would offer a "revolving line of credit" with an indefinite repayment period and charge interest of 18% annually on the first $500 of unpaid balance, 12% on the rest. Minimum payment: $55 a month for 41 months. The First National Bank of Kansas City would lend for only one year, at 15.75%. Monthly payment: $180.

FINANCE COMPANIES charged the highest rates. Typically, Household Finance Corp. would demand 18% annually on a 30-month loan. Monthly payment: $83.27.

One happy thought for the salesman: though his loan would be unsecured--since a vacation cannot be foreclosed or repossessed--he would have little trouble getting it. Only one lender, People's Finance Co. of Somerville, Mass., expressed reluctance. If the salesman were salaried, he would get $1,000--the company's maximum to anybody--at 18% interest. If he worked on commission, Manager Edmund Naddaff would turn him down flat. Why? Like many people in the business, Naddaff has his own intriguing theory: a commission salesman, he says, is likely to be "manic-depressive as a person" and thus a poor credit risk.

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