These sneaky little devils are the common fall of many a man. The interest rate is the extra amount that a lender charges for the use of assets. The interest rate is commonly noted on a yearly basis, this is known as the annual percentage rate, or more commonly known as the APR. The assets borrowed could include cash, or it could also include consumer goods, or other large assets such as a property or vehicle.
Understanding Interest Rates
Interest is best described as a rental or as a leasing charge to the person borrowing for the use of an asset. In the case of larger assets, like properties, cars, boats, etc., the rate may serve as the actual interest rate. If the borrower is considered to be low risk, the borrower will then typically be charged a much lower interest rate. If the borrower is considered a high-risk liability, the interest rate then will obviously be much higher. For loans, the interest rate is applied to the principal, which is the amount of the loan. The interest rate is the cost of debt for the borrower and the rate of return for the lender.
When Are Interest Rates Applied?
Interest rates are commonly applied to most borrowing or lending transactions. These Individuals borrow cash to buy homes, launch businesses, personal projects, or to pay for schooling. Businesses take loans so they are able to fund projects and grow their operations by buying fixed and long-term acquisitions such as land, machinery, and buildings. The borrowed money is then repaid either in 1 big lump sum by a pre-selected date or in periodic installments. The loan to be repaid is typically always more than the borrowed amount. This is because lenders require compensation for the loss of use of the money during the loan period. Sound crooked? Well it kind of is, but that’s the price you pay. In one sense they are providing the borrower a service. Since the lender could have invested the funds during that period, but instead provided a loan, which could have potentially generated income for them. The difference between the original loan and the total repayment sum is that the interest charged is applied to the remaining amount of the principal.
The difference between APR and APY
Interest rates on most consumer loans are normally quoted as the annual percentage rate, again we commonly refer to this as APR. This is the rate of return that lenders demand for the ability to borrow their money, as we covered above. For example, the interest rate on credit cards is quoted as an APR. The APR does not take into consideration any compounded interest for the year. On the other hand, then, the annual percentage yield, yep you guessed it, we call this the APY. The APY is the interest rate that is earned at a credit union or at a bank from a savings account or certificate of deposit. This interest rate however, unlike the other takes compounding into account.
Now that I have you educated on interest rates; you know what to look out for. Honestly, you shouldn’t be to intimidated by them, just understand them and avoid high rates if you can. If you find yourself or your business struggling, taking out a loan to help that has killer rates could be the straw that breaks the camels back, or the final nail in the coffin. Whatever phrase you prefer. If you’re also starting out, and don’t yet have credit established, or if you’ve already struggled with it, you may find all your options currently possessing high rates. Unfortunately, if your credit is in bad standing, getting a loan at all can be very difficult. If you do find yourself or your business qualifying for one, you may be surprised to notice how high the interest rates are. If you’re someone who always has pretty decent credit, you are still at risk from random offers. Know that if your score is in order, you should be able to find very reasonable rates, so don’t settle for anything crazy.