Whether you are purchasing a home, applying for a credit card, or taking out a personal loan, one issue that will always come up is; what will be the interest rate?
An interest rate is a specific percentage of the principal amount that is usually charged for using someone else’s money. Banks will pay you an interest rate on your deposits since they are borrowing the money from you.
Likewise, any loan that you take from a lender also attracts interest rate. In this post, we shall focus on the interest rate charged on loans and not the interest you earn for depositing your money in a financial institution such as a bank. Here are the top five facts about interest rates that you need to know.
Credit Cards Charge More Than One Interest Rate
Did you know that a single credit card may charge multiple rates for different things? Well, that is the case, and you need to be wary of this fact when applying for a credit card. For instance, you will most likely pay a different interest rate for purchases, balance transfers, and cash advances.
When you open a new credit card account, you will also incur the introductory balance transfer interest rate. Never assume that you are paying a single interest rate on your credit card debt.
Types of Interest Rates
The interest that you pay on a loan will largely be determined by how it accumulates. The two common types of interest rates are; simple and compound interest rates. The simple interest rate is calculated by simply applying the rate on the sum amount of money borrowed or the outstanding balance of the principal amount.
However, compound interest is usually calculated at set intervals- weekly, monthly, quarterly, bi-annually, or annually. All the unpaid interest is added to the principal amount to establish the new amount.
Most payday loans in Canada charge simple interest, but auto loans and mortgages usually charge compound interest.
Most Interest Rates are Variable
Except for the introductory rates that aren’t always 0%, the interest rates charged by money lenders tend to be variable. This means that the interest rate is tied to what is known as the “prime rate.” If the prime rate shoots up, so will your interest rate.
Your Credit Rating Affects Your Interest Rate
One of the top reasons why your credit rating is crucial is that it determines your interest rate whenever you apply for a loan. Typically, the higher your credit score, the lower your risk of defaulting hence lower interest rates.
When you apply for a loan, the lender will request for your credit history report from any of the credit bureaus in Canada to assess your creditworthiness. The credit report contains your credit score which the lender will use to determine your interest rate.
You Can Negotiate Your Interest Rate
If you are unhappy with your current interest rate, you can always call your lender and request a review. Believe it or not, most lenders are willing to listen to your concerns and in most cases; they will lower your interest rates if you call to negotiate.
As long as you have an excellent credit score and you are looking to pay off your loan quickly for some reason, the lender will listen to you.