Before taking out a loan, whatever type, there are a few things you should consider. Understanding the different interest rate types can be a good way to understand how you can get the best deal when choosing from different loan options. Choosing the right loan with the right interest rate could help you save a lot of money.
The Lowdown on Interest Rates
It’s important to know some background information on interest rates. They represent the amount of interest you are spending on your loan. Generally, the higher the interest rates, the more the loan will cost and the more you will spend. It is not always as simple as that, though. Always keep in mind that interest rates do not always represent the total cost of a loan.
Also, certain interest rate types fluctuate and change based on a given set of underlying market changes or the terms of your loan agreement. If you are unfamiliar with these underlying market changes or indexes, the lender could end up taking advantage of your situation. This could mean that you may be stuck with much higher monthly charges or payments than you had anticipated.
Most Common Rates
There are ways to maximize your savings by understanding which interest rates will cost the least. These rates take into consideration the period of time and the loan amount. Here are six of the most common interest rate types:
- Fixed Interest – Fixed interest rates stay the same over the lifespan of the loan. Because they are simple and typically used for long-term loans, they tend to be used for consumer lending. More specifically, they are extremely common for home mortgages.
- Variable Interest – Variable interest rates, unlike fixed interest rates, change over time and are based on an underlying interest rate. Some typical underlying interest rates include the cost of savings index, prime interest rates, or the 11th district cost of funds index. When one of these indexes goes up or down, so does the variable interest rate. This means it can fluctuate on a weekly or monthly basis. These are often used for long-term home mortgages and may give an advantage to either borrower or lender.
- Simple Interest – This is a basic interest rate type in which interest is paid only one time and the rate does not change. The simple interest is calculated by multiplying the principal by the rate and the term.
- Prime – Prime interest rates are often the rates that commercial lenders will give their best customers. These rates are commonly based on the U.S. federal funds rate and typically apply to the rate in which banks and other commercial entities use to lend to one another. While consumers don’t typically get the prime rate, this rate can help inform other rates for personal lending.
- Compound – This interest rate type can be thought of as an “interest on interest” rate. Compound rates charge interest on the principal and on interest from previous interest earnings. These types of rates are often used for positive interest on personal savings accounts and credit cards.
- Discount – These rates are used by the US Federal Reserve when lending money to financial institutions over a short time period. The discount rates are generally based on cash flow analysis and projections. They typically help companies cover funding shortages or when companies run into more serious issues with liquidity.
Learning how interest rate types differ from one another can be a great starting point to understand how companies and banks are able to lend money. While some of these rate types usually only apply to businesses and larger institutions, knowing the basic difference between a fixed and variable rate can go a long way.
Choosing between a fixed and variable interest rate for your loan could help you save a lot of money in the long term. Whether you’re looking for a short-term loan or interested in buying a house, being aware of the different types of interest rates that are out there could help you save money in the long run and help you accrue greater wealth.
What this Means for You
As a payday loan and installment loan provider, Cash Factory USA follows laws in each state to make sure your loan rates apply with applicable state law. Each state is able to regulate their own fees and interest rates. For more information, you can explore rates for specific loan costs and payment schedule examples in the state you live in.
To make it easy to understand, the interest rate type is broken down to give you the “Scheduled Payback” and the “Annual Percentage Rate” (APR). The APR is the total amount of your interest, described annually on the total amount of the loan. As the number of days of a short-term loan increase, the APR will usually change, often getting lower.
Loans for Unexpected Expenses
Some loans are designed to help individuals fill their short-term financial needs. If an unexpected expense occurs, such as a car repair or a medical bill that needs to be paid, these loans may be able to provide immediate options where alternative choices are limited. If you are able to meet the basic requirements and have the information to fill out an application, you could be approved within one business day.*
Cash Factory USA is here to help you figure out your payday loan and installment loan needs. Get pre-approved and get cash in your hands when you need it most.
*Short-term loans are not intended to be long-term financial solutions. Customers with credit difficulties should seek credit counseling. A single payday advance is typically for two to four weeks. However, borrowers often use these loans over a period of months, which can be expensive.