I came across the term Bombay 5-6 recently, and it turned out to be a term for Money Lending in the Philippines that targets those who cannot borrow from normal sources.
The 5-6 relates to the financial basics of the lending rate.
They lend you 5 and you repay them 6. Normally within 40 days. This works out at a flat rate of 20%.
What exactly is a FLAT RATE of Interest ?
Flat Rate = the rate of interest that is charged on the original balance, and doesn’t decrease with the balance over time.
How does that compare to an APR rate?
APR = Annual Percentage Rate, where the interest charged decreases in proportion to the balance.
So: A 20% Flat Rate for a 40 day term equals an APR of: 176.12%
WOW !!
No wonder the cheaper lenders are so popular with an APR rate of only 90%, or 10% Flat rate.
But, just to put some perspective on this… a standard Home Loan may only costs about 9.5% APR. But only available to those with a good credit standing.
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