The matter of borrowing is to get some money now but repay it together with interest when the term is due. Interest is the fee lenders take for providing you with financing. For customers it’s very important to have a clear idea of what interest means, how it works, is calculated and how to choos ethe product with the lowest interest possible.

What is Interest – definition, how it works, example

If you are a borrower, for you interest will mean the price you are going to pay for a loan. It’s usually expressed in the percentage known as percentage rate. The reflection of interest is the percentage of the loan amount charged annually. It’s also called APR, or Annual Percentage Rate.

For example, the average APR for a personal loan is 15.5%. If you barrow $5,000 for a year, your interest will constitute 15.5% of the loan amount, which is – $775. It means you will be charged 775 dollars for a $5,000 personal loan. As a result, the total cost of borrowing will be $5,775.

If you borrow the same amount for 2 years, the interest will reach 31%, or $1550.

Such calculations will allow you to check your rates, decide which term suits you best and find the cheapest loan for your personal needs.

APR vs Interest

Any time you come across loans, you face the term of APR. It is annual percentage rate. This figure represents the loan interest charged on a yearly basis. It’s used to predict how much the loan is going to cost in a year or longer. Legitimate lending companies are required to mention their APR in the disclosure so that consumers were aware of what the loan is likely to cost them in the future.

The APR you are offered depends on many factors the most important of which are your credit score, your income, loan type, loan amount, and others.

Simple and Compound Interest Rates

Depending on what the interest is set on, there’re two main types of interest:

  • simple – is set on the principal loan amount
  • compound – is set on both the principal and the compounding interest paid on that loan.

How do interest rates vary among different loan types?

Mainly, interest rates can be lower or higher depending on several criteria:

  • Borrower’s credit score.
  • Loan term.
  • Secured or unsecured loan type.
  • Loan amount.
  • Borrower’s income.

Let’s take as example 4 different loan types and check their rates:

Loan typeLoan amountLoan termCollateralCredit scoreIncomeAverage interest rate
Payday Loan$100 – $1,00014 – 30 daysNone, UnsecuredFor all creditsAny income type299 – 1400%
Installment Loan$1,000 – $5,000Up to 1 yearNone, UnsecuredFor all creditsAny income type17.8%–19.9%
Car Title Loan$1,000 – $10,000A few monthsSecured by a car titleFor all creditsAny income type200% – 300%
Personal Loan$5,000 – $35,000A few yearsNone, UnsecuredFor all creditsAny income type3% – 36%

Which types of loans have the lowest interest rates?

If you want to get the loan with the lowest interest rate, consider applying for a secured personal loan from direct lender. Moreover, pay attention to your credit history. Good credit score will guarantee you cheaper loans.

In brief, the safer you are as a borrower the lower interest the lender will offer. So, do your best to prove your creditworthiness. Provide the proof of regular income, improve your credit score, offer some valuable asset as collateral and the lowest rate is guaranteed.

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