What is interest rate?
In the most basic terms, interest rate is either the cost of borrowing money (a loan) or a reward for saving it. In this blog post, we will focus on interest rates and how they affect loans, so don’t worry about it in terms of saving money at the bank.
Loans are made up of 3 components:
How do interest rates work?
Interest rates will be added as part of your repayment plan and will be included on top of paying off the principal of a loan. Lower interest rates are better for borrowers.
It’s important to remember that interest rates can vary based on the type of loan you’re looking at, as well as how they are determined. Interest rates are determined by 3 factors:
1. Base rate
The base rate is set by certain market factors, such as the Federal Reserve’s requirements.
2. Lender policies
Lending policies tend to vary from place to place, and some places will have higher and/or lower interest rates than others.
3. Credit history
Your credit score and history are factors that are completely in your control. Good and excellent credit scores get the best interest rates, which are lower than people who have fair, poor, or bad credit ratings.
What is the difference between interest rate and APR?
Both APR and interest rate are ways to describe loan cost.
APR is shorthand for annual percentage rate, which is the total cost of the loan, including the interest and principal, over the cost of a year.
Interest rates will inform what you pay during each payment period, which is typically (though not always) done on a monthly basis.
What does 0 interest rate mean?
You may have heard the phrases 0 interest rate, 0 percent interest or 0 percent APR on commercials, usually on car commercials. 0% interest just means that there will be no interest charge on top of the principal. All you’re paying off is the principal.
Still, it’s important to read the fine print — in many cases, the 0% interest rate or 0% APR is only available for a certain amount of time and will be something that comes up later.
A 0% interest rate can be advantageous if you have a lot of money upfront and can pay off a loan earlier, which cuts you a better deal than having to pay interest on top of the principle borrowed.
How to find interest rate
There are multiple types of interest rate and calculating some of them can be complex. For example, compounded interest can vary greatly and the numbers aren’t always fixed.
But at the very least, calculating simple interest is a good way to give you a good idea of what you may be looking at.
Simple interest calculation
Simple interest is calculated using the following formula:
I = Prt
In which I is the interest amount, P is the principle, r is the interest rate, and t is the time (calculated in years). You will multiply the principle, interest, and time to determine how much the interest is.
Simple interest rate calculation
If you want to figure out your interest rate (the percentage) instead of how much the interest will cost overall, you’ll need a slightly different formula:
r = I/Pt x 100
In which r is the interest rate, I is the interest amount, P is the principal, and t is the time period of the loan (in years). You divide the interest amount by the product of multiplying principle and time. You should get a decimal from that calculator, which you will then multiply by 100 to see the interest rate as a percentage.
Total loan cost (with simple interest)
If you want to know how much a loan will cost you, there’s a formula for that, too:
A = P(1 + rt)
In which A is the total amount, P is the principal, t is the time period of the loan (in years), and r is the interest rate.
What’s great about this formula is that it can also be used to determine how much a loan can cost in a certain amount of time.
I am still having issues calculating interest
If you’re still having issues calculating interest and interest rates, there are many tools available for you to use. There are calculators that can calculate simple and even compound interest and interest rates for you. All you need is to be able to fill in the blanks.
Find your interest rate options with LoanStream
LoanStream can help you find what your loan options are, and therefore, your interest rate options as well. All you need to do is fill out our application form, and our network of lenders will send you offers for a loan. Then you can select the lender whose loan works best for you (and remember: look for low interest rates).