Student Loan Consolidation Center

For lenders to make money on what they loan to borrowers, there is an interest rate attached.  The amount of interest will depend on a number of factors such as the lender, the market, the type of loan, the length of the loan, and even the state of your credit.  Of course, the lower the interest rates - the better.  This article will talk about what interest rates are and why securing a loan with a low rate is so vital.

What is the interest rate?  This is actually a fee that is tacked onto borrowed money.  Now, interest can also be attached to other things than a loan to include shares, assets, and shares.  For a lender to determine the amount of interest, there are different formulas that come into play.  For instance, if you were to take out a loan from your bank or credit union, the lender would start by looking at things such as the amount being borrowed, as well as your credit score.

As mentioned, the interest rate is a type of compensation that goes back to the lender in exchange for them loaning something, usually money.  This means the lender does not actually use any assets but loans them to the borrower, who in turn uses them for whatever purpose.  This amount is known as the “principal”, which is what the interest rate goes toward.

If an interest rate is high, two things happen.  First, your monthly payment on the loan would be higher than if you had a low interest rate and second, once you had finished paying off the loan, the actual amount paid back would be greater than with a low interest rate.  As an example, if you took out a mortgage loan at 6% versus 10%, you would actually be savings tens of thousands of dollars once the loan has been paid in full.  Therefore, it is important to secure the lowest rate that you can.

Credit has a direct impact on the interest rate you would be qualified for as well.  People who have great credit are considered favorable customers.  This means the lender has little risk in loaning money so they are happy to offer better terms.  However, if the borrower has poor credit, they are automatically a risk to the lender.  Therefore, the lender will add on a higher interest rate in anticipation that they will make enough money early in the loan to counter any default.

Not only is it important to understand what is the interest rate but also the different types of interest.  The following will help educate in this area.

• Simple – What is the interest rate in this category?  This is a type of interest calculated on the principal of the loan only or on unpaid principal.  The formula in this case involves the period interest rate, initial balance of the loan, and the number of time periods that have passed.
• Compound – With this option, interest is somewhat like that of simple interest but over a period of time, any unpaid interest goes back onto the balance of the loan.  That means if you would be required to pay interest in interest charges.  When looking at loans that have compound interest, it is important to have information upfront so you can determine just how much the loan will actually cost.
• Fixed and Floating – In the case of a commercial loan, compound interest is usually used but many times, a loan of this type could easily have different interest rates during the loan’s life.  If the interest rate remains the same over the course of the commercial loan, then it is considered fixed.  However, in the situation where the interest rate would change, it becomes known as a floating rate.
• Market – Now, for the question of what is the interest rate, there is also what is known as market interest rates.  In this case, the interest would go against things such as bonds or money market accounts.  For the actual amount of the interest to be determined, lenders will look at a variety of factors such as unexpected inflation rate, real return or inflation index, and others.

In summary, the answer to what is the interest rate currently being offered it depends largely on the market.  Often, the government will have some level of influence and of course, there are other dynamics.  If you are thinking about buying a home, taking out a student loan, getting a credit card, or buying stocks and bonds, you can talk to a financial professional to see what interest rate you can get.  In fact, you can also conduct online research using specially created calculators that will give you a better idea of what to expect.

No matter what type of loan you need, you definitely want to secure the lowest interest rate possible.  With this, you will have more affordable monthly payments and ultimately, pay less over the life of the loan.