We all deal with interest rates on a daily basis. This fact applies to everyone regardless of whether they have a credit card, a car loan or a mortgage.
Interest rates affect the profit margins for businesses, how fast businesses grow, how much you are paid, the cost of literally everything you buy, the rate of inflation, the interest paid on your savings account, the FTSE, and foreign exchange rates. The list of things affected by the interest rate is so long that one writer somewhat jokingly noted that the energy output of Betelgeuse, a star over 600 light years from Earth, was the only thing she felt comfortable saying was not influenced by interest rates.
The More Immediate Effects of APR
For most of us we deal with APR in three areas; credit cards, car loans, and mortgages. We have previously written in the TransferGo blog about how our credit score can impact the interest rates we are charged. In this instalment, we want to look a bit deeper into interest rates and ways to find the best ones.
APR, annual percentage rate, is the total amount of interest the lender will charge us annually to borrow money.
When taking out a loan there are a number of factors to consider.
The interest rate – This is the amount you will be charged to use the money. Many adverts refer to a “representative” APR. This means that at least 51% of the credit issuer’s customers are paying this rate. Your rate can be higher based on your credit history, job, or the reason for the loan.
The length of the loan – This is generally referred to as the “term” of the loan. For a fixed cost item, like a car or a home, the loan documents will lay out the term of the loan in months and will include the frequency and amount of each payment. Most loan documents will include a summary that shows the total amount you will pay the issuer once you have paid off the loan. Make sure that you are able to make the monthly payments. In general it is better to opt for the shortest term possible that fits your budget. Longer term loans will usually have lower payments, but your overall costs of borrowing the money will be significantly higher.
Fees and charges – Loan documents will generally have a list of fees or charges that the borrower will have to pay for items like missed payments, special statements, and even using certain types of payment methods. While these are not part of your APR, make sure you know and understand all of the potential fees, as they can substantially increase the cost of borrowing money.
A note on credit cards – Credit cards are notorious for charging high interest rates, even for those with decent, and even great, credit ratings. They are also notorious for having low minimum monthly payments. While it is not always possible to pay your entire balance every month, always pay more than the minimum. Paying the minimum monthly amount means that you are paying interest on the interest you have already been charged. Additionally, if you pay the minimum amount each month, it can take you a decade to pay off even a relatively minor balance.
Steps for Getting a Loan
Information is your best tool for finding the loan that is right for you. Spending a bit of time on research can result in substantial savings.
First check your credit rating – Get a copy of your credit rating, and pay particular attention to any errors or incorrect information. The better your rating, the better your interest rate. Knowing your score ahead of time will give you extra negotiating power.
Shop around – Look at all of the sources available for the type of loan you want. Find the best APR offered, paying attention to any fees or additional charges.
Calculate your monthly payment – While it is possible to do the maths yourself, the better way is to use an online calculator. This will allow you to look at various scenarios where you can change the rate, the term, or the monthly payment to see how it will impact your overall cost of borrowing.