Why are Loan Interest Rates Important?

| November 27, 2013

Interest RateMany people around the world use loan facilities. This might be with their bank or another financial institution, and could be a long-term loan or a short-term “payday” loan in order to deal with immediate financial obligations.

There are a number of factors to consider whenever you take out a loan of any description. One of the biggest can be the interest rate – the rate at which you pay to borrow the money. Worryingly, many people don’t even consider their loan interest rate, or whether it is fixed or variable.

Why Interest Matters

The biggest irony about people not looking at interest rates when they take out a loan is that, if they were opening a savings account, then they would probably be highly interested in the rate at which interest is added.

The most important thing about an interest rate is the way in which it can make repayment periods longer. This is a difficult balance to achieve when taking out a loan. Do you go opt for paying less money per month, but more over the longer-term owing to the interest rate increasing the cost of borrowing the longer you borrow for?

This is an especially important consideration if your loan is variable rate. Although most personal loans are fixed rate, many companies do still offer variable rate loans as it enables them to attract customers with what appear to be competitive interest rates. For example, a variable rate loan might be sold to you on the assumption that the interest rate, and therefore your repayments, will remain at a consistent level, even though the company may know themselves that the rate is likely to increase. To make these offers look even better, things such as the first three or six months at a fixed rate, or even no payments during that time, are often made available.

Problems with Ignoring Interest

Whether unaware of interest because you don’t know how finance works, or because you signed up to a loan and forgot about payments –

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this can happen if you have a direct debit close to your pay date, the money is never there so you don’t miss it – you could be faced with a problem.

The obvious one is that if you have a variable rate loan, your payments may increase. This is the sort of problem that most look when taking out a loan and think, “I’ll cross that bridge when I come to it,” often out of their desperate need for a loan at the time.

However, if loan repayments were right on the cusp of what you could afford already, you’ll find yourself missing payments, which then sees further charges and interest added, quickly getting you to the point where you’re going to be making repayments for much longer than you initially planned.

Be Aware

Whatever your reason for taking out a loan, be sure that you are clear on what the interest rate means, how it is applied, and your own capabilities for repaying the loan itself.

Author Bio: John is interested in various aspects of the finance industry and markets, and writes regularly about everything from loans to taxi insurance and other niche components of the sector. John lives in Chicago with his two children.

Why are Loan Interest Rates Important?

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