Taking out loans and credit has become the norm in today’s society. Instant gratification, ‘I want it now’ mind frame, and paying for things with borrowed money. Borrowing money has become easier than ever with banks, credit companies and private individuals lending money to almost everyone. Each time you take out credit you are hit with an interest rate. The interest rate is that special figure which is going to cost you a lot more money than you initially borrowed.
Say you borrow $1000, the interest rate is 15%, then you are going to pay back an extra $150. The interest rate your loan or credit card will have will depend on who the lender is, your credit history and how much you are borrowing.
Interest is how loan lenders make their money. It would make no sense to lend money to people without making a profit. However, not all interest rates are created equal. For second-chance loans, for example, the interest rate is usually much higher than when you take out a mortgage. Interest rates on credit cards vary from bank to bank, credit company to credit company. Some places offer credit cards with small interest rates of about 7-10%, while others stick to ridiculous interest rates that sit at about 25%. Yes, people still use them.
Interest rates are the extra amount you are forced to pay when you take out any sort of loan and they come in various packages. Some interest rates can be variable, others fixed. Variable and fixed interest rates are very common when taking out a mortgage. When an interest rate is variable the credit company can reduce it and increase it as it sees fit. So today you’re interest rate might be 10%, but if you’re on a variable rate it can go up to 15% or down to 8% at little notice and no say from you. Fixed interest rates are ones that are fixed to stay the same for a certain period of time. If interest rates are low and you know that there’s a risk that they are going to increase then it’s a good idea to get them fixed for one to five years.
Contrary to many people’s beliefs, interest rates can be negotiated. Remember, you are the client and banks and other credit companies want clients so that they can make money.
The problem is that most people don’t negotiate because they are clueless or they don’t know how to. Whenever you apply for credit you should consider asking for a lower interest rate. Your success will depend not only on your negotiation skills but also on your credit history and your relationship with the bank or credit company. Don’t be afraid to ask, the worst thing they can say is no but you might be surprised and get a much better offer, especially when you tell them you want to be a long term customer.
Interest rates are not only calculated on credit and when you take out loans. They are calculated on your savings account also. In this case, you want to have the highest interest rate possible so that your money works for you. If you have $1000 sitting in your savings account, and the interest rate is 5%, then you $1000 is going to make you an extra $50 by the end of the year.
Interest rates aren’t always bad. Sure they cost the borrower money, but they can make the saver money too. If you want to pay less interest, then the only thing to do is either don’t take out any loans or when you borrow money to pay it back as soon as you can.
By making extra repayments you will reduce the life of your loan and pay less interest.