Understanding interest rates is an important thing to do if you are planning to borrow money. Here are a few factors that you need to consider when evaluating interest rates:
Type of Interest Rate
Interest rates are either fixed or variable. Fixed rate remains constant throughout the period making it predictable. Variable rate depends on the market conditions, making it uncertain and hard to predict.
Research Market Rates
Research and compare interest rates of similar products to give you a benchmark in evaluating the interest rate offered. Consider different factors like inflation, economic climate, bank policies and other factors that influence interest rates.
If you’re evaluating different loan offers from different lenders, then compare their interest rates. Look for an interest rate that is suitable for your financial situation.
APR or annual percentage rate is a factor you need to consider as well. APR takes into account the interest rate and additional charges of your debt. Assessing the APR will help you determine the total cost of your debt.
Check the Time Frame
Evaluate the total duration of the borrowing period. The time frame of your loan will significantly impact the total cost you have to pay. Long term loans will mean you pay more interest whereas you will save interest on short term loans.
Understand Compounding Interest
Interest rates are sometimes compounded. Compounded interest rates are calculated on both the principal and accumulated interest over time. It can significantly affect the total amount you have to pay back.