People often view revolving payments in a negative light, believing they have high interest rates and preferring to avoid using them if possible. However, there are several payment methods for revolving payments, and handling fees and payment periods vary depending on which one you choose. If business owners familiarize themselves with revolving payments and interest rates, they can provide customers with the right information and ensure they use revolving payments in a way that avoids problems.

In this article, we explain the interest rates and payment methods for revolving payments, which are closely related to credit card payments.

What’s in this article?

• Annual interest rates for revolving payments
  
• Revolving payment methods and handling fees
  
• Handling fees for revolving vs. installment payments
  
• Revolving payment handling fee and interest rate frequently asked questions (FAQs)
  
• The importance of understanding revolving payment interest rates
  

Annual interest rates for revolving payments

There are two types of revolving payments: one is used for making purchases, and the other is used to borrow cash using the cash withdrawal function. Interest rates vary for each type of revolving payment.

As the most commonly used revolving payments are those customers use to make purchases at physical and online stores, this article will focus on revolving payments used for shopping.

When learning about financial products and revolving payments, you will often come across terms such as “interest,” “interest rate,” and “annual interest rate.” The term “annual interest rate” refers to the interest rate per year. However, the terms “interest rate,” “annual interest rate,” and “interest” are often used interchangeably.

Although it varies between financial institutions, the effective annual rate for revolving payments usually ranges from 15%–18%. In Japan, the Interest Rate Restriction Act sets the maximum interest rate on loans at 15%–20% per year, depending on the amount borrowed.

Interest rates set by the Interest Rate Restriction Act

For example, if the principal amount borrowed is ¥1 million, the maximum interest rate will be 15%. In this example, the maximum interest that can be charged in a year is:

¥1 million x 0.15 = ¥150,000

However, the handling fee for this revolving payment is not ¥150,000. This is because revolving payments involve a monthly payment that gradually reduces the balance. Since the amount a customer needs to repay determines the repayment period, it could take longer than a year, or they could clear the balance more quickly with larger monthly payments. The handling fee amount will vary greatly depending on the conditions.

Some see interest rates on revolving payments as high. Below is an example to show how much they can be. Then, we show how the amount of money borrowed, the interest rate, and the monthly payment affect the total repayment amount.

First, let’s assume the amount borrowed is ¥1 million; the interest rate is 15%; and the monthly payments are ¥100,000, ¥50,000, and ¥10,000 respectively. Below, we compare the total handling fees and total payments.

*Using the fixed principal method

*This calculation is for informational purposes only. Actual amounts might differ.

In the results above, small monthly payments mean the handling fee increases considerably. If the customer makes payments over a longer period, it is not uncommon for handling fee payments to be larger than that of the principal in the early stages.

Next, we provide an example with the interest rate and monthly payment amount remaining the same but with the amount borrowed doubled to ¥2 million.

*Using the fixed principal method

*This calculation is for informational purposes only. Actual amounts might differ.

Even though the amount you borrow has doubled, the handling fee does not double. Even with the same interest rate, it is important to note that the amount borrowed and the monthly payment amount will have a significant impact on the handling fees you will ultimately pay.

If you make payments over a long period on a revolving payment plan, the total fees can be higher than the initial amount borrowed. If you’re choosing to use a revolving payment plan, plan ahead, and use it wisely.

Revolving payment methods and handling fees

There are other repayment methods for revolving payments in addition to the fixed principal method used in the example calculations. These include:

• Flat amount method
  
• Fixed rate method
  
• Variable amount method
  

The handling fees, monthly payment amount, and repayment period will vary depending on your chosen repayment method.

Fixed amount method

There are two types: the fixed principal revolving method and the flat amount revolving method. Because the fixed principal method allocates a larger proportion of the payment toward the principal, the total amount repaid is less than with the flat amount method. Below, we take a look at both of these methods in more detail.

Fixed principal method

This method uses a fixed monthly payment amount that excludes handling fees. The handling fee changes every month depending on the remaining balance, so the amount you pay each month will also vary.

Flat amount method

You can specify the amount you want to pay—including handling fees—and repay the same amount each month. The monthly payment amount remains the same regardless of whether you make any additional purchases. As the repayment balance decreases, the handling fee ratio also decreases. However, in the early stages, the large ratio of handling fee to principal can make it difficult to reduce the principal. This makes the total repayment amount larger than with the fixed principal method.

Fixed rate method

This method calculates payments by multiplying the outstanding balance by a fixed percentage plus a handling fee. As a result, the amount you pay will decrease as your balance decreases. However, while a low fixed rate keeps the monthly payment amount down, the principal reduces slower, and it takes longer to completely pay off the balance.

Variable amount method

The monthly payment amount increases or decreases in stages according to the outstanding balance. The terms and conditions vary between financial institutions.

For example, if the payment balance is less than ¥100,000, the payment amount is ¥10,000. If it is between ¥100,000 and ¥200,000, the payment amount is ¥20,000. If it is between ¥200,000 and ¥300,000, the payment amount is ¥30,000, and so on.

Handling fees for revolving vs. installment payments

Installment payments are a similar payment method to revolving payments. It can be difficult to tell the difference between the two, as both are paid in installments. You might be wondering which is more economical in terms of handling fees.

However, it isn’t possible to make a general comparison to work out which is more cost-effective, as handling fees differ depending on the financial institution and the chosen revolving payment method.

When comparing the fixed principal revolving method and installment payments under the same conditions, the handling fees work out nearly the same or slightly lower for revolving payments.

Revolving payment handling fee and interest rate frequently asked questions (FAQs)

Below is a list of frequently asked questions about interest rates and handling fees for revolving payments:

What is the maximum interest rate for revolving payments?

The maximum interest rate is 15%–20%, depending on the amount borrowed.

How much is the handling fee for a revolving payment of ¥10,000?

The handling fee will vary depending on the payment method, the commission rate, and the monthly payment amount. For example, if the amount borrowed is ¥10,000, the commission rate is 15%, and the monthly payment amount of the principal is ¥3,000 using the fixed principal method, the total handling fee is ¥244. (This is a simplified calculation; actual amounts might differ.)

How much is the handling fee for a revolving payment of ¥50,000?

The handling fee will vary depending on the payment method, the commission rate, and the monthly payment amount. For example, if the amount borrowed is ¥50,000, the commission rate is 15%, and the monthly payment amount of the principal is ¥3,000 using the fixed principal method, the total handling fee is ¥5,381. (This is a simplified calculation; actual amounts might differ.)

The importance of understanding revolving payment interest rates

In this article, we explained various repayment methods for revolving payments, as well as the interest rates and handling fees. “Revolving payments” as a general term refers to multiple repayment methods, each with different characteristics. It is important for business owners to have a good understanding of the revolving payments system they want to offer customers.

Stripe is currently preparing to support installment payments, revolving payments, and bonus payments for credit cards in the Japanese market. The beta version is currently available for testing, so if you are a business owner who is interested in trying it, please contact us.