What Are Interest Rates?

Interest Rate Definition
An interest rate is the cost of borrowing money from a lender and can be variable or fixed depending on the type of loan.

Interest rates can vary by product and lender. Other factors, such as your ability to pay and general creditworthiness may also be considered in your interest rate calculation. Generally speaking, you may qualify for a lower interest rate on a loan if you have a positive credit rating and a good payment history. Alternatively, you could be charged a high interest rate if the lender considers you a high credit risk.

A good interest rate could save you money.

5 things to consider if you’re looking for a good interest rate:

  1. Are you creditworthy? Know your credit score and how much money you owe in comparison to your income.
  2. Check out websites like Best Company, Credit Karma, Lending Tree, and Trust Pilot to compare loan options.
  3. Ask about credit qualifications before you apply.
  4. Look for a personal loan product, like BestEgg, that can give you an interest rate estimate without impacting your credit score by making a soft credit inquiry versus a hard credit inquiry.
  5. Is the rate variable or fixed? A variable-rate could increase whereas a fixed rate stays the same for the length of the loan.

How Does Interest Work With a Personal Loan?

With a personal loan, interest is charged on the principal balance. Interest may be fixed or variable depending on the product. If you make timely payments on a fixed-rate loan, your principal balance and the monthly interest that’s charged between payments will begin to decrease — helping you to pay down the loan over time.

Consequences of Variable Interest Rates

Variable interest rates are calculated based on an index. Two commonly used indexes are the prime rate or the London Interbank Offered Rate (LIBOR). When the index rate changes, the interest you pay on variable interest rate loans and credit cards is subject to change. Before you apply for a variable rate loan, be sure to understand the terms and compare them to the terms of a fixed-rate loan.

What Kind of Interest Rate Should I Expect?

Learning all you can about how to qualify for a low-interest rate can help set realistic expectations if you’re in the market for a personal loan.

Your credit score, credit history, debt to income ratio, and financial stability are just a few factors that go into determining your interest rate.

You can find both your DTI and your credit score out now with Best Egg Financial Health.

To learn more about loan options, visit Best Egg’s Personal Loans page or Contact Best Egg to speak to a representative.