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HomeCredit UnionWhat is an Interest Rate

What is an Interest Rate

What is an Interest Rate

So what is an interest rate and is it a big deal?

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Interest RatesInterest rate; the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

It’s one of the most important aspects of a loan for any borrower. Yet, at times its sometimes difficult to understand.

It determines how much money of a fee you will be paying the lender for the cost of having the loan, and it may mean you’ll pay a lot more or a lot less than you originally planned. In its simplest form, a rate which is charged or paid for the use of money.

 

YOU wants to borrow $1,000. The local credit Union says “your interest rate is 10%“. Therefore, to borrow $1,000 for 1 year it will cost:

$1,000 × 10% = $100 Total of $1,100

In this case the “Interest” is $100, and the “Interest Rate” is 10% (but people often say “10% Interest” without saying “Rate”)

Of course, you will have to pay back the original $1,000 after one year, so this is what happens:

  • An interest rate is often expressed as an annual percentage of the principal.
  • It is calculated by dividing the amount of interest by the amount of principal.

 

Why Your Credit History is Important

If you have a well-structured credit history, with little to no delinquent accounts in your name, you’re likely to get a low interest rate, which is typically below 5 percent. (It also depends on how long your borrow the money and the item)

Now, if your credit history is poor, the chances you’ll be approved for a loan are low or your interest rate will be high. This means because you are considered risky for the bank to loan you money, you get charged a higher interest rate. If you are approved, chances are your interest rate will be very high, more than likely in the double-digit range (10 percent or greater). If your in need of working on your credit to identify spots you need to work on, check out  how to get Your Credit Report.

You can get a Free Debt Consolidation Quote to see what rates are available right now.

How does it Affect Your Income?

If you pull in a high income, and can prove it, then you may be able to obtain a low interest rate on a loan. Also, the opposite applies to someone with a low income or an inability to prove their income.

The lack of proof or cash means the lender will more than likely want a high interest rate to command because the loan presents more risk to the lender.

Reputation of the Lender

Is this lender a financial institution or a convenience lender (think of a payday lender)?

Applying for the right loan at the right financial institution will ensure you don’t ripped off down the line. As you can see from the example above. When Payday lenders charge 30% or even as much as 150%.

Who wants to pay 150% for a loan? $1,000 dollars borrowed with a total loan of $2,500!!! NOBODY

Payday lenders have been known to charge far beyond the 100 percent interest, according to the Center for Responsible Lending.

Thus, that is why its important to understanding your credit reports and credit score.

Sign-up for your Free 10 Days to Financial Freedom check out the blog post on 3 Ways to get your Credit Reports.

 

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