How Finance Rates Can Make Or Break Your Loan
Doug Smith

Defined Tag: Finance Rates.

Here is why you need to understand finance rates in order to make large purchases. Most consumers consider their homes and cars to be their biggest purchases. It is unlikely that they can pay cash up front for these high-priced purchases. However, a credit union or bank will lend you the money, giving you a large lump sum of cash, provided you promise to repay it over many years with reasonable monthly payments. This service is not free. Banks charge you a finance fee on the money they lend, as the cost for this convenience.

This finance fee is also called the interest rate. It is an odd name, because only the bank is interested in it! When you finance a loan, the interest is a percentage of the loan principal or amount borrowed. The financed rate can be stable, as in a fixed-rate loan. The interest rate can change, as in an adjustable rate mortgage (ARM). Each monthly payment you send consists of both principal and interest charges. Once you have paid off the loan, the total amount of money you will have paid back to the bank will exceed the initial amount financed, because of the interest charges.

There are some rules of thumb for obtaining the lowest financial interest rates when borrowing money. Borrowers with high credit scores and good credit ratings generally earn lower interest rates than those with low credit scores and bad credit. Borrowers with steady long-term jobs and low debt are also more likely to get a lower lending rate. Consumers with bad credit or low-paying jobs can still get loans, but the lender will counter the increased risk of default by raising the financing rate and/or asking for collateral to secure the loan.

Refinancing is a method of taking high-interest debt and transforming it into low-interest debt. If you refinance your mortgage loan from the original financed rate of 8% down to a new rate of 5%, your monthly payments will decrease and you will save money over the life of the remortgage loan. When you are approved for refinancing, that loan will be used to pay off the existing higher interest financial loans in a lump sum. Then you will start repaying the refinanced loan at the lower rate.

Credit unions and banks are competing for your lending business. Compare interest rates and loan repayment terms from several financial institutions before making a decision. Consult online banks too, because their low overhead allows them to offer very competitive finance rates for any loan you might need.

Copyright 2008 by Doug Smith. All Rights Reserved Worldwide. Unauthorized Duplication Prohibited. Not Intended As Professional Advice.