When taking out a loan, your lender will explain details of the interest rate and the way that the interest rate impacts your monthly payment, but this can be a confusing process for new borrowers.
It’s especially hard to understand how this works without some basic information, and some lenders simply don’t take the time to make sure that their borrowers fully understand the complexities of interest rates, but Car Capital Financial is different.
This guide will help you better understand the differences between types of interest rates, allowing you to make a more informed, better decision about whether or not one of our safe, reliable and no-credit check car title loans is a good idea for you.
Types of Interest
First, comes the question what is interest, and what is an interest rate?
Interest is simply defined as the cost of borrowing money. Typically, interest is expressed in a percentage, and is used to calculate how much money you’ll need to pay your lender for the convenience of receiving a loan from them.
In lending, the amount of money you originally borrowed is called the principal, which you’ll have to pay back, along with the added cost of borrowing the money, which is referred to as interest.
If you borrowed $1,000, and had an interest rate of 10%, then you’d owe $1,100 to your lender, since you owe the original principal amount ($1,000) plus the interest cost (10% of $1,000, which is $100).
Interest comes in a variety of forms though, which is where some people get confused.
Fixed Interest Rate Loans
Fixed interest rate loans are the simplest types of loans, and typically, the best for consumers.
They come with an interest rate that won’t fluctuate over time, isn’t tied to market conditions, or anything else – because it’s fixed.
When you take out a fixed interest rate loan, you know exactly how much money you’ll need to pay back over the lifespan of the loan, because it’s easy to calculate the total cost of added interest.
The major advantage to getting a fixed interest rate loan is that you’re protected from rising interest rates, better able to plan your finances well into the future, and can easily plan a monthly budget since you know the exact price of your monthly payments.
Downsides to fixed interest rate loans are that you can’t take advantage of rate reductions (should interest rates fall), and other potential additional costs like not being allowed to pay more than your monthly payment, or not being allowed to pay your loan off early.
Variable Rate Interest Loans
With variable interest rate loans, lenders reserve the right to update interest rates at some specified point in time so that they match prevailing market conditions.
Typically, these types of loans are worse for borrowers, since a lender would only update the interest rate if the rates have risen since they originally issued the loan, thus making the borrowers monthly payments more expensive.
If you take out a variable interest rate loan, then you don’t know what your monthly payments will be as soon as the interest rate is allowed to fluctuate, since you can’t predict whether or not interest rates will rise and fall by that time, or by how much they might change.
The good news about variable interest rate loans is that they typically don’t come with restrictions on making additional payments (meaning you can pay the loan off early), but this isn’t always the case.
The bad news about variable interest rate loans is that they often end up costing borrowers way more than they originally thought, since increasing the interest rate can dramatically inflate the costs of the loan.
Annual Percentage Rate
Often expressed as APR, this is the percentage of interest that is paid on the loan, calculated annually (yearly). If your monthly interest rate is 2%, the APR would actually be 24%, as the percentage gets multiplied by 12 months in the year.
The APR is a calculated rate that not only includes the interest rate, but also takes into account other lender fees required to finance the loan.
The idea behind APR is to help consumers understand the tradeoffs between interest rates and the fees paid at closing (such as paying higher fees to lower interest rates or increasing interest rates to cover closing costs).
For the purposes of this article, the most important thing to keep in mind is that you understand whether or not your loan will come with a fixed interest rate, or a variable interest rate, and that if it does come with a variable interest rate, that you understand the potential implications.
Car Capital Financial
If you are still unsure of what type of loan best fits your financial situation, and you are in need of some immediate cash assistance, give Car Capital Financial a call now to find out about your options.
We’ve provided safe, reliable and affordable car title loans to Southern California residents for over 15 years, and we offer low-interest, secured personal loans without requiring credit checks.
All you need is a car that’s fully paid off, or near being paid off, and we can get you up to thousands of dollars in cold, hard cash in as little as 30 minutes. Title loans are issued based on the borrower’s ability to repay the loan.
Call us at 1-888-500-9887 to find out if our safe, reliable and affordable auto title loans are a good fit for your financial needs.