Doing The Math On Loan Interest, A Vital Step
Posted on June 7, 2008
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Interest can be confusing. Trying to figure out how much a loan is costing you is something you want to do, but many people say “Forget about it.” when they start trying to do the math.
The problem with figuring interest is that it is not always calculated the same. You have to begin with reading the terms of your loan agreement. You should be able to find out exactly how the interest is calculated in there.
To give you a basic idea, here is the formula for figuring interest for a one month period. The loan amount is $1000 and the interest rate is 5%.
Multiply $1000 and 5% (which is equivalent to .005)
The answer is $50, which is the interest you would pay for that month.
You may be thinking that is easy, but you usually have a loan for longer than one month. So you have to figure interest for each month in the life of the loan. There’s also a big factor called compound interest where you’re paying interest rates on the interest accrued.
Sometimes it is easiest to go to your lender and have them figure it for you. This is really important in terms of understanding the full scope of a loan. It will save you some headache in the long run and it’s a service your lender should offer…to show you everything detailed in black and white.
3 Things That Will Qualify You For A Loan
Posted on May 31, 2008
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It can be confusing trying to figure out all the factors a lender uses to qualify you for a loan. While there may be many things a lender looks at when deciding to give you a loan, there are really only three things that are going to matter.
- collateral
- credit
- income
A lender is always thinking about getting paid.
They want to know you will pay them back. If you have good collateral to put down on the loan then the lender likes this because they know if you default they get that collateral. They like to see good credit because it shows you pay back your debts. They also like to see steady and stable income so they know you have the money to pay them back.
The bottom line in qualifying for a loan is that if a lender can not be certain you will pay them back then you will not qualify. It really is that simple.
Reasons Why Bad Credit Equals High Interest
Posted on May 23, 2008
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It is often confusing why lenders would charge higher interest rates to someone with bad credit. A person with bad credit does not need the higher payments on a loan that come with higher interest.
It seems more rational to charge a person with bad credit lower interest so the payments can be more affordable and they are not stuck in the loan for so long. However, there is very good logic behind the lender charging higher interest rates to bad credit borrowers.
When a loan payment is made only part of that payment is paying the actual loan balance. The majority of the payment pays the interest and that is money directly in the lender’s pocket.
The lender isn’t stupid. They know that a person with bad credit is more likely to default on the loan, so they charge higher interest so they can get more money in their pocket right now just in case the borrower defaults.
Now that is smart lending.
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Posted on May 19, 2008
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