If you take out a loan, the lender will charge you an interest rate on the amount you owe. You’ll then need to pay the interest as you make your loan repayments. Let’s dive deeper into what interest rates are and how they work and how to calculate interest rates.
What are interest rates?
Interest rates are the costs you pay to borrow money. They’re usually expressed as a percentage and affect the total amount you’ll pay for a loan. Interest rates compensate lenders for the risk of lending to you and their inability to use the money anywhere else.
How do interest rates work?
If you take out a loan, you’ll need to repay the principal, which is the original amount you borrow plus interest. The interest rate you receive will depend on a number of factors and increase the overall cost of your loan. A lower interest rate can sometimes save you hundreds or even thousands of dollars.
How to calculate interest rates
Here’s how you can calculate interest rates for simple interest loans and amortizing loans:
Simple interest loan
Simple interest = principal loan amount * interest rate * time
Amortizing interest for one month = (interest rate / number of payments per year) * remaining balance
When do borrowers have to pay interest rates?
The type of loan you choose will determine when you pay interest. Here’s how interest works with several different types of loans.
- Payday loans: Once you receive your money, you’ll need to repay it in full plus interest when you get your next paycheck. In many cases, your payment term will be within two to four weeks.
- Lines of credit: You can borrow as much or as little money as you’d like up to your set credit limit. You’ll pay interest on the amount of cash you withdraw during the repayment period.
- Installment loans: After you receive a lump sum of money, you’ll pay it back plus interest via a fixed number of payments or installments. You’ll do this during your repayment term, which can be anywhere from several months to several years.
- Title loans: Upon approval, you’ll repay your title loan with interest when your loan repayments are due, which can vary depending on the lender and loan terms. Fortunately, you’ll be able to continue driving your vehicle while you do so.
High vs. low interest rates
When looking for the right loan, you may be wondering what the difference is between high and low interest rates. Loans with high interest rates are more expensive for borrowers than those with low interest rates, and a high interest rate means you’ll have to pay more over the life of the loan. Make sure to compare different loan options available to you, and choose one that comes with a lower interest rate. This way, you can borrow the money you need at a rate you can afford.
What determines loan interest rates?
Here are some factors that can determine the interest rate you’ll receive on a loan, including:
The amount of money you borrow will play a role in your interest rate. You may get a different interest rate for a $500 loan than a $2,000 loan.
Whether you get a payday loan, installment loan, line of credit, or title loan, the type of loan you choose will affect your interest rate. Some installment loans may come with lower interest rates than payday loans, for example.
Interest rate type
Depending on the loan you take out, you may pay a fixed interest rate or variable interest rate. A fixed interest rate remains the same over the life of the loan, while a variable interest rate changes based on the market.
Loan repayment terms
The amount of time you have to pay back your loan will also affect its interest rate. If you take out a loan with a shorter term, for instance, you might receive a lower interest rate but with higher payments.
How to get good loan interest rates
Here are some ways you can get good interest rates on a loan:
- Compare loan options: There are many lenders out there offering loans with varying interest rates and terms. Make sure to do your research and compare options to find a loan with interest rates that work for your budget.
- Improve your credit score: Improving your credit score can help you qualify for loans with lower interest rates. You can improve your score by making consistent on-time payments, paying off debt, and disputing any errors on your credit report.
- Opt for a shorter repayment term: You can often get better interest rates by opting for a loan with a shorter repayment term. Although monthly payments may be higher, you may end up saving money by paying less in interest.
How Advance America interest rates work
Advance America offers different types of loans including payday loans, installment loans, title loans, and lines of credit with interest rates that can vary. You don’t need good credit to get approved, and can fill out an application online from the comfort of your home. Upon approval, you’ll receive the funds right away sometimes the same day you apply or within 24 hours. Visit Advance America today to learn more about the loans and interest rates we offer.