Really, that’s the problem that a lot of people seem to have. Figuring out the “best” lender isn’t exactly an easy task, especially given that we each have different qualifications for what makes a financial institution better than another one. To some extent, picking the “best of the best” is a personal decision.
Still, that doesn’t mean that there aren’t some objective facets of lenders to look at in terms of what’s good and what’s bad. Today, that’s what this article seeks to examine, particularly in relation to interest rates. While they might not be the most exciting thing to read about, that certainly doesn’t mean they aren’t important.
If you learn nothing else about loans, let it be interest rates that you become familiar with. Stick around to get more details on what they are, how they work, and what to look for from lenders for those trying to decide on one.
What are Interest Rates, anyway?
To start, let’s cover what interest rates are. When a person borrows money from a lender, there’s obviously an expectation that they’ll be paying back that principal amount in full. However, there’s an additional charge as well, and that comes in the form of interest rates. You can read about some of the motivations behind its creation here: https://www.masterclass.com/articles/what-are-interest-rates.
Realistically, lenders wouldn’t really be making a profit off of lending if they were only having borrowers repay the principal. Interest is their way of still making money off of this, as it is a percentage-based charge on the remaining balance of a credit agreement. You can think of it as a fee for each “period” in which you’ve got the loan.
Pretty simple, right? While this is just the basics, it’s the majority of what you’ll need to know. As we delve into the specifics, though, keep in mind that the different types of interest that can be charged can play a huge role in how much you could end up owing. Be sure to look out for that in your contract, once you are offered one.
There are two main types of interest to be aware of, the first of which being “simple.” As the name suggests, it’s certainly the less complex one of the two to understand. The formula is as follows: P (principal) x i (interest rate) x n(term of the loan). Using that, you can calculate this pretty easily.
Of course, that requires knowing all of those variables, including what they stand for in the first place. Let’s discuss each of them, then. The first is “P,” which stands for “principal.” As you probably already know, that’s the starting amount that is borrowed.
Next is “i,” which stands for interest rate. This is usually a percentage, although for the purpose of the equation (if you’re actually calculating it by hand), you may want to convert it into a decimal. As for “n,” it’s just the term of the loan, which is how long the repayment period will last.
Most of this information should be readily available to you from your lender. If it’s not, it’s probably a good idea to ask for it. Even if you’re not calculating it yourself, these are still things that you should be aware of before you borrow money – after all, it can have a big impact on how much you’ll be spending each month.
This one is a bit more complicated, as you can probably guess. To get some background information on it, you might want to check out this page. Since the formula is a lot more complicated, we won’t waste much time on it. Instead, just know that this sort of interest builds up a lot faster and builds upon itself as well.
How does that work? Well, as interest accrues on your balance, with the simple kind, that’s not factored into the rest of it as it builds up. However, with compound, the new balance is what’s used to calculate the new interest. Yeah – it’s kind of hard to explain, but the important thing is that it tends to be a lot more expensive for the consumer.
Naturally, for most loans, lenders go for the compound option. When we open a savings account, though, it’s far more likely to be using the simple model. It can be frustrating, certainly, but from a business perspective it makes sense.
Why Does it Matter?
All of this math stuff can be tiring, for sure. It makes a person wonder why it’s important in the first place – can’t we just apply for loans and not worry about the interest rates? Well, it’s not really in our best interest to do so, even if it would make life a little bit more convenient.
The trouble with not knowing what to expect with your interest rate is that it can result in you not being prepared for a big spike in your monthly payments, as just one example. That’s why finding one with lav rente can be such a big deal – it means you don’t have to worry about something like that sneaking up on you. If you’ve got a really high interest rate, and it’s compounded, you could go from a balance of one hundred NOK or dollars to a balance of one hundred and seventy-five before you even realize it.
Obviously, no one wants to deal with that sort of thing. That’s why being an informed consumer can be so important, especially when it comes to credit agreements. If you don’t know what to be on the watch for, though, there are a few things to be aware of.
Obviously, you’ll want to look at the interest rates that each lender you’re considering is offering. While you can do so on your own and manually do the research, there are also resources that we can use nowadays that allow us to compare them on one site. It makes things a bit easier, at least, but you certainly don’t have to do so.
Beyond that, though, check if they charge compound or simple. As was mentioned above, there’s a pretty low chance that it’ll be simple. However, if you are able to find one that does, it’s certainly something to prioritize (unless that simple rate is still absurdly high, in which case, you might want to start doing some calculations).
The next thing to keep an eye on is the length of the loan. This is often referred to as the repayment period or “term” of the credit agreement as well, if you’ve seen it referenced that way. This determines how long that you’ll have the monthly bills from this particular debt, as well as how long the interest will be charged for.
For most borrowers, the shorter the term, the better. However, this isn’t always the case, so you’ll have to decide for yourself what it is that you would prefer. In a similar vein, it’s not really likely that you’ll be able to find a lender that meets all of the things on your wish list unless you have an excellent credit score.
That’s not to discourage you, of course, but instead to keep your expectations grounded. Decide early on what your most important wish list items are when it comes to shopping around for lenders. Think about what your credit score is, and how realistically your wants align with that. Unfortunately, those with fair or low scores are probably not going to find the lowest interest rates available.
Why is that? Well, lenders examine the applicants for loans and use their credit scores to determine how high or low risk that they are. The higher the risk, the lower chances of approval – but the bigger chance that if you’re approved, you’ll have a high interest rate. It’s not necessarily a problem, of course, but something that borrowers should keep in mind as they submit their applications.
Applications aren’t too difficult to fill out, thankfully, especially since we can do a lot of it remotely now. The real question, though, is what to do once you’ve been approved. Really, that’ll depend on what your goal was when you decided you needed a loan. However, hopefully it does involve careful budgeting and planning, as well. You see, once the funds are disbursed to you, you’ll start to be responsible for paying the money back. This can be stressful if you’re not prepared, so always keep that in the back of your head as you make purchases or spend the loan – you will have to pay it back.