- slide 1 of 3
It does not matter if you are shopping around for a mortgage, other type of loan or looking at a credit card statement, terms such as “interest payments” and “percentages” or “interest rates” are terms that keep surfacing. As an educated consumer, you should take the time to make sure you have a full understanding on how to define interest payments and percentages before you enter into any financial agreements with any type of creditors. Once you come to understand what the terms mean and how to use each one, you can then choose loans and credit accounts that are the best options for your financial situation. This is what turns a standard consumer into an educated consumer.
- slide 2 of 3
Interest payments are in addition to the portion of principal payments you make to a lender in order to repay the loan and credit card balance you have with the creditor. Interest payments are the fee a lender charges you for to borrow money. You can calculate the interest payments you are paying a creditor using a percentage, which is the interest rate on the loan. You also need to have the principal balance of the loan and the time frame you have the loan or balance outstanding to calculate the interest payments you owe.
- slide 3 of 3
Two percentages you should be familiar with are the interest rate on the loan and the annual percentage rate (APR). The standard interest rate is the percentage the lender uses to calculate the monthly payments you owe to the lender. Again, these payments consist of a portion of principal, which reduces the balance you owe on the loan, and a portion of interest, which is the amount the lender collects for lending you the money.
The annual percentage of rate (APR), on the other hand, describes the annual cost of credit to you. In loan situations, where you have up-front costs associated with establishing the loans (closing costs), the APR is the percentage that takes the interest rate and the up-front costs into consideration. This means that the APR is higher than the interest rate.
Having two percentages or rates often confuses the consumer who is comparing their loan, mortgage or credit card options. When shopping and comparing two of the same type of loans against one another, it is important to compare the APR because this is the rate that takes the total costs into consideration. Even in a situation where the interest rate percentage is lower on one loan, if the APR is higher, then the loan with the lower APR is offering you the better deal. If you are simply calculating your monthly payments, however it is the interest rate percentage that you should use to calculate the payment.
Image Credit (Morgue File)