Understanding Interest Rates For Different Loan Types

Interest rates are a common part of any type of loan. There are different terms depending on the type of loan that you take. To know how the interest is calculated and what it will mean for your repayments, you will need to learn the different terms. Here are the basic terms you will come across in your loan needs.

A Nominal Interest Rate

This is the basic rate of interest and is simplified for borrowers. Basically, the percentage will tell borrowers how much they will pay in interest for each $100 they borrow. If it is 1%, they will pay $1 for each $100. A real interest rate will take inflation and deflation into account. It's a little trickier for borrowers to work out.

A Fixed Interest Rate

The clue for this is in the name of the title. This type of interest, common with personal, car, and short term loans, is fixed percentage. It is usually for a period of time, and makes it very easy to work out just how much interest will be paid over time.

Many mortgages will start with a fixed rate and then move into variable rates. They will also usually be higher rates than the variable options, because lenders can't take advantage of rising interest rates once the loan has been signed.

Variable Interest Rates

As the name suggests, variable rates mean that the rates of interest will change each month or year, depending on the market. This can mean that a borrower benefits from market rates dropping, since he/she won't need to pay as much each month. However, the rate will increase when the markets go up again.

Variable rates are popular for the types of loans that go into the decades. This is especially the case for mortgages, where they will remain fixed for a short term and then move onto variable rates. It is impossible to predict the market for decades, making it difficult for borrowers and lenders to determine the amount that will eventually be paid back.

Introductory Rates

Some types of loans will offer introductory rates. This is often the case for credit cards, where you may get a 0% interest rate for the first 12-24 months, for example. It is important to remember that this is just an introductory rate and a new rate will be applied at the end of the term. You'll need to find out what that rate is, so you are aware if you don't clear the balance in full afterwards.

Take your time to understand the different types of interest rates for loans. They are not all the same, and making a mistake in the choice of rate you take could mean overpaying by hundreds of dollars. For more information, visit websites like http://www.firstmortgagecompany.net.

About Me

Understanding Financial Freedom

About 10 years ago I can honestly say that I didn't understand what it meant to truly be financially free. I was bound by my monthly bills, just doing whatever it took to keep my creditors happy. It was a terrible way to live, and I was really depressed. I didn't know how to change things, but I knew that I had to start somewhere. Eventually, I decided that it would make the most sense to make a financial plan and try to dig myself out of debt. That simple decision was all I needed to completely change my life. This blog is all about understanding financial freedom.