How Does Interest Work With Bank Loans
When personal finance and we’re talking about interest okay what is it how does it work is it good is it bad and it’s both honestly but it doesn’t mean that it’s confusing but I really want to make sure that everyone understands how interest works because it is a very very big factor one that’s of personal finance.
How is it good for you how is it bad for you and then go from there I don’t know how you guys like to take your news but when I’ve got good news and bad news I normally take the bad news first so we’re going to start there all right when most people hear the term interest it’s normally because they’re talking about a loan alright what is the interest rate on your credit card what is the interest rate on your car loan what is the interest rate on your mortgage alright all these are loans from a bank and they all have interest rate attached to them.
When you take out a loan from a bank or credit union they want you to pay off the original amount that you borrowed right let’s say you borrowed $10 000 buy a car they want you to play that $10 000 back plus interest which is extra money that goes to the bank right that’s how they make their money on loans through interest and how much interest you pay them is entirely based on your interest rate.
When you’re taking out a loan you want to make sure that your interest rate is as low as possible because if you do this it means you’re going to give less money to the bank, and form of interest and save you money. When it comes to loans, it’s really really simple. You want a low interest rate – the lower the rate, the less you pay and the higher the interest rate, the more do you pay.
Like I said, when it comes to loans, low interest rate that’s what you want. What we’re going to do is we’re going to make a little scenario. We’re going to pretend someone is buying a car. In one scenario, the person is going to do their homework find a good bank or credit union, and get a good interest rate on their loan and see how much money they pay in interest.
On the flip side, we’re going to show what would happen if they don’t do their homework or if they go somewhere they get about interest rate and find out how much interest they pay at that point.
So let’s take a look at that all right. Let’s set the foundation. This person wants to buy a car for $10,000. They want to pay the car off in 3 years, and they find a good credit union or a bank that gives them 2% interest. Another thing here real quick. I don’t quite want to show you how to calculate interest just yet, but for today’s purposes, just understand that I’ve already done the math for this and I know how it works out. In this example, $10,000 over 3 years at 2%, this person will pay the bank $311.59 in interest.
So that means when you take the original $10,000 that she borrowed plus her interest over those three years, she paid a total of $10,311.59. This truthfully would be considered a pretty good loan. All right now let’s take a look at what would happen if that person didn’t decide to do their homework or research or they just went with the bad bank. So that same person let’s say they did a ten thousand dollars three years kept those two factors exactly the same but let’s change it they didn’t get 2%, they got 10%.
Let’s see how that changes the math. That comes out to $1,617.60 which means they really spent $11,617.60; that’s a difference of $1,306.01!
That’s a pretty big difference. I don’t know about you guys, but I do not want to pay the bank an extra $1,300 if I don’t have to. This is just one example and honestly it’s kind of a small one. When you’re talking about houses or more expensive cars or something like that, the difference can be tens of thousands of dollars.
I’m not joking so that was just to illustrate how interest is really really important when it comes to loans and why you need to do your research to make sure that you were getting a low interest rate on your loans.
Now I’m not going to lie to you what largely determines the interest rate you get on your loan is going to be your credit score and I kind sound like a broken record player but I don’t want to talk about that right now that’s in another article, but for now you need to know interest rates on your loans are not helping you.
You want them as low as possible all right guys we’ve got the bad news out of the way now how interest rate to fix this on loans and how it hurts us now we can go on to the good part and see how it intersects benefits us.