What To Know About Interest Rates

October 25th, 2016 | by EditorOne
What To Know About Interest Rates

When you borrow money, lenders will charge a fee for the right to do so. This is generally referred to as a finance charge or your interest rate. The interest rate is determined by how risky the lender deems the borrower to be. What else should you know about interest rates?

Secured Loans Come With Lower Rates

Assuming all other variables are equal, a secured loan generally comes at a lower interest rate than an unsecured loan. This is because the lender has something that he or she repossess and either resell or liquidate as needed. With an unsecured loan, the only security a lender has is the word of the borrower. Therefore, that lender will charge more for the right to borrow.

Interest Rates Can Be Fixed or Variable

The interest rate on a loan can either stay the same through the life of the loan or vary throughout the life of the loan. In many cases, a variable rate loan is lower when the loan is first executed. However, the borrower may benefit from a fixed rate of interest because it makes it easier to budget for a consistent monthly payment. Generally, an interest rate may change on a variable loan every year, two years or five years. Title loans in Florida generally come with a fixed rate.

Penalty Rates Can Inflate the Cost of Your Loan

If you make a late payment, you could be hit with a penalty rate in addition to late fees charged by the lender. In some cases, this could cause your 0 percent interest credit card to suddenly have a rate of up to 29.99 percent, which could cause your payment to jump by hundreds or even thousands of dollars per month. It may be in your best interest to review any loan paperwork that you have to determine if there is a penalty rate and when it may come into effect.

You May Lower Your Interest Rate by Refinancing

If your credit score increases, you may be eligible for a loan at a lower interest rate. Interest rates may also rise or fall based on the health of the overall economy. Generally, when the economy weakens, interest rates fall in an effort to spur investment and consumer spending. When the economy gets better, rates increase to spur off the effects of too much inflation. Borrowers who think that they may be overpaying for a loan may want to look into whether or not they can refinance to a loan with a lower rate to save money.

Interest Rates Are How Lenders Make Money

Knowing your interest rate is important because it is how lenders make money, which means that they want to charge as much as possible. They also want you to take as long as possible to pay off your loan. That is why you may be given an exceptionally high credit balance or approved for a loan that last seven years when you really only need five to pay it off.

Before you borrow money, make sure that you understand how interest impacts your loan and your payment. Doing even a few minutes of research can help you save money and make it easier to repay any money that you do borrow.