Smile while you can -- the piper will come calling.
Credit is what you are given, and debt is what you will carry. The latter is always heavier than the former. The weight of that burden is determined significantly by the interest rate attached to a loan. Whether you are buying a home, buying a car, starting a new business or trying to pay for your education, understanding your interest rate, and how it fits with the other features of your loan, is serious business.
Know the Variables
Interest rates are not the only variable for determining the net advantages or disadvantages of a loan. Interest rates, depending on the specific language of the loan agreement, can be compounded at different intervals. If the full payback amount is paramount in your calculations, then a lower interest rate on a loan that has a longer lifespan may not be as advantageous as taking a higher interest rate for a shorter loan life. The full payback, for example, on a 15-year $100,000 mortgage at 7 percent is $205,000. The payback for the same principal at a 5 percent rate, over 30 years, is $250,000.
Low-to-No-Interest Car Loans
Another example of low interest as a possible disadvantage is a low-to-no-interest automobile loan. As of 2011, the interest rates have been slashed in response to a protracted economic crisis, and low-to-no-interest is common on car lots. But read the fine print. If the low-to-no-interest loan disqualifies you for a substantial rebate, you may lose money in the long run. Remember, the interest is determined by the principal, and large rebates lower the principal.
Student Futures
Many students have fallen into debt traps before they even graduate from college and begin their careers. Minimizing student debt requires the student to understand what loans are available and who offers the best interest rates. The best deals for college students are still those offered by the federal government. Whether you are applying for a Pell Grant, Stafford Loan, Perkins Loan or a work-study program, you will need to fill out the Free Application for Federal Student Aid (FAFSA). If you max out federal dollars, go first to Overture Technologies' Student Loan Marketplace, where you can use student loan calculators to see what is available.
Plastic
Credit cards are loan vehicles. The worst interest rates available outside of using a loan shark are credit cards. In 2010, the average interest rate on a credit card was 14.7 percent, with some cards charging over 20 percent. There are credit cards that charge lower interest rates, and it pays to shop for the best deal you can get. Also, ask the issuing company if the rates can arbitrarily be raised without notifying you. Some can. The zero-interest deals on credit cards are not permanent features of the card. The zero-interest period is usually a year, after which the same card's interest can jump dramatically and be applied to your remaining principal.
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