What you Need to Know About Interest Rates for your Loan

Are you thinking about getting a loan or adding to your borrowing in any way? There’s lots to think about before borrowing money – remember you are signing a legally binding contract and are responsible for the repayments. That’s why you need to do your best to educate yourself on the terms and what they mean for you. Of course, interest rates play a big part in loan agreements – as such we’ve given you some info on what you need to know about interest rates for your loan before you sign on the dotted line.

What Are Interest Rates?

In simple terms, the interest rate attached to your loan is the amount of money you are charged in return for borrowing from the lender.  This is displayed as a percentage of the loan amount.  Typically, the more you borrow – the higher the percentage amount will be. Whenever you borrow any money from an institution – there will be some kind of interest attached.

What will Affect the Interest Rates you are Offered?

When generating your offer, the bank will consider multiple things. Of course, as mentioned the amount you are borrowing will come into play.  The higher the amount borrowed, the more interest you can expect to pay.

It will also take into consideration the period of time you’d like to pay the loan back over. Typically, the longer the payment term – the higher the interest rate you will be offered.  This is why usually it’s best to pay back the debt as quickly as your budget will allow.  Your credit rating will be a contributing factor as it helps the lender to establish your history in terms of paying bills etc on time – and will give an indicator on your current lending levels.  Of course, the objective of the lender is to make the risk for them as low as possible.  If you aren’t sure what your credit rating is, use a checker to get a good idea.

You will also be asked what your annual income is, as well as regular outgoings such as mortgages, childcare costs etc. This is when your debt to income ratio is calculated.  Your debt to income ratio is the amount of money you owe out each month, compared to the amount of money you earn.  To be clear this doesn’t include expenses such as groceries etc that fluctuate just costs such as the aforementioned bills and credit card payments you may need to make.  Here are some tips on how you can reduce your monthly outgoings.

There are Different Types of Interest Rates Available

What you should also note is there are different types of interest rates that are often available when taking out a loan.  There is a fixed interest rate, which effectively does what it says on the tin. This is a rate that will not change throughout any time during your payment period. This is fairly popular based on its simplicity, and it’s easy to understand. You also know exactly where you are with a fixed rate.

You could also potentially opt for variable interest rates.  Here, your interest rate will fluctuate over a period of time.  This will move in line with the base interest rate and is outwith your control. This means if the economy is experiencing a tough time the interest rate will be lower, however if it is doing well, there will be a higher rate if the base interest rate increases.  Borrowers do this to protect themselves. Some people tend to avoid this rate, as it is less stable than the fixed rate where you know what you are paying out each month.

Annual Percentage Rate (APR) is also an option.  This is the total amount of the annual interest across the total cost of the loan.  It’s often used by credit card companies who set out interest rates when a balance is carried over. An APR is simply the prime rate as well as whatever margin the lender wants to add to the borrower.

If you are lucky enough to be a favored member of your bank – then you may be offered a prime rate.  This is typically lower to what would normally be offered to customers and is linked to the U.S federal funds rate.  This would be reserved for low-risk, big customers where the bank is completely confident in their repayment and know there would be no default.

If you are contemplating getting a loan, or adding to your borrowing in another form – then make sure you do take the interest rate options available to you into consideration. It’s critical that you sign an agreement that is in-keeping with your own personal circumstances.

Chris Skeldon

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