Understanding Interest Rates on Loans

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Needing to borrow money is never a fun position to be in. Still, the fact of the matter is, the average personal debt is growing, the average person owing approximately $38,000 in debt.

While that may seem like a massive figure to some, it should come with a small sense of relief; many people are in the same boat, and financiers are now competing to give us the best -and the cheapest- way to borrow money.

Interest Rates Made Simple

In straightforward terms, the interest rate is how much it will cost you to borrow money over a set amount of time. Some loans, like logbook loans from companies such as www.carcashpoint.co.uk, are short-term and meant to be paid back quickly, usually around a year. Other loans, such as mortgages and bank loans, will generally have a more extended repayment schedule. Mortgages typically take around 30 years to pay back.

A simple way to calculate how much the interest of a loan will be is like this: If you borrowed $5000 at an interest rate of 10% and used the full term of your loan agreement to pay it back, you’d need to pay back the $5000 you borrowed, plus 10% on top which would be an extra $500, meaning your total repayment would be $5,500.

It’s not always quite that simple, though. If your loan agreement is for the same numbers as above and the term is a year, you’d pay back $5,500 over 12 months. If you found you could pay back your loan in 6 months, you’d only pay half of the interest ($250). This would mean that over 6 months, you would pay $5,250.

Many online tools can help you work out the interest rate you are being charged and how much it will cost you over time. It’s always worth using one or two of these tools before signing any agreements so you are fully informed about the money you will be owing.

Glossary of terms

When it comes to borrowing money, the terminology used can make things quite confusing. Here is a very quick glossary of some of the most commonly used terms when it comes to loans, interest, and repayments.

Lender – the person, bank, or company, loaning you the money

APR – Annual Percentage Rate, the most common type of interest, charged on an annual basis

Principal – a fancy way of saying the amount you are borrowing from the lender, “Nathan owes the principal sum of $10,000.”

Asset – usually, this refers to a physical item or possession like a house or a car, but sometimes relates to cash or consumer goods.

Credit rating – your own personal score so lenders can decide how much of a “risk” you are to lend money to.

Goods – Possessions of value, these might be personal possessions like laptops or expensive art, or commercial things of value like a stock, material, tools, etc.

Creditor – the person or company to whom you owe money. The lender lends the money, but you may pay back a different creditor (if your loan is sold on, for example).

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