From credit cards to home mortgages, interest rates are a common part of life. That’s why it’s critical to know the terms of your debt … and how much it’s going to cost you in the long run.
Interest is a fee paid by a borrower to a lender for the privilege of using their money. As simple as that sounds, interest can get complicated fast – especially when you start to look at factors like amortization, loan term, accrual, and fixed or moving rates.
If that seems overwhelming, don’t worry: We’re here to help with a no-fear guide to rates.
Q. Is a lower rate always better?
Yes – and no. Let’s say you’re deciding between two loans: Loan A, which offers a low interest rate for a 10-year term; and Loan B, which has a slightly higher interest rate for a 30-year term.
If you plan to pay back all your debt quickly, Loan A will probably save you money. But if you have to refinance your loan in ten years, you could end up paying more in interest if rates go up. Loan B offers a slightly higher interest rate – but in exchange, you have the security of knowing your rate won’t change over time.
Q: Why do interest rates go up and down?
At the most basic level, it’s supply and demand. When more people want to take out loans – to expand businesses, buy products, finance homes and so on – the price of borrowing money tends to rise. When people are less willing to borrow, the interest rate tends to go down.
Fiscal policy also plays a role. When there’s a downturn in the economy, the Federal Reserve will often artificially lower the interest rate in an effort to keep money flowing in the economy – which is a major reason why rates are so low right now.
Q: With rates so low, do a few points on a percent really make a difference?
If you see a rate of 3% and a rate of 3.25%, they both might seem pretty low – so why split hairs? But when it comes to interest, even small differences can add up to a hefty price tag.
For example, say you’re seeking a $500,000 commercial loan, with a 10-year term and a 25-year amortization. Even a rate difference of one quarter of one percent – like the difference between 3% and 3.25% – could amount to over $10,000 in additional interest over the life of the loan. That extra expense goes straight to your company’s bottom line, so it’s important to shop around.
Q: How do I choose a loan that’s right for me?
When it comes to finances, there’s no “one size fits all.” Choosing a loan means looking at multiple factors: your income, your savings, the term of the loan and even your plans for the future. Be sure to research different lenders and their rates.
At Axiom Bank, we’re committed to providing competitive rates and personalized loans that work for you. To learn more, visit www.axiombanking.com.
Axiom Bank, N.A., a nationally chartered community bank headquartered in Central Florida, provides retail banking services, including checking, savings, money market and CD accounts, as well as commercial banking, treasury management services and commercial loans for both real estate and business purposes.