The most important things to understand about interest rates

May 31, 2017
You need to understand how the interest rate on your credit card or loan translates into how much extra you will have to pay on your balance.
The most important things to understand about interest rates

You have probably heard plenty of warnings about high interest rates. What most people fail to understand, however, is that interest does not necessarily have to be a negative thing. If you can manage your credit cards and loans correctly, your interest rate will actually not be a major problem.

Here are some facts that you should know.

  • Secured loans always have lower interest rates. A secured loan means that you, the borrower, provide collateral. This is usually in the form of your house or your car. Basically, your property is a backup for the loan. If you do not pay, the lender can take possession of the house or car and sell it to get their money back. Of course, this is only a negative arrangement if you fail to pay. The upside of secured loans is that since the lender has this built-in backup, they have to assume lower risks. This means that they can charge a much lower interest rate.
  • You can get a secured credit card, and you can apply for a personal loan using your car as collateral. However, most credit cards and personal loans are unsecured. Since there is no collateral to use as backup, the lender or credit card company will usually charge you a higher interest rate. What you should know, however, is that in these cases, a high interest rate is not necessarily a bad thing. If you manage your loans and credit cards correctly, you will not even notice the high interest rate.
  • Generally, interest charges become a problem when you keep a balance on your credit card. If you pay off all your charges within one month, you will not have to pay any interest. If you can do this month after month, it will not matter if your interest rate is five percent or 35 percent.
  • Online personal loans are good for this kind of “quick payoff” strategy as well. Since you are only borrowing a few hundred dollars at a time, you can pay off these loans quickly and avoid having to pay interest. Even if you do pay interest for a month or two, the extra costs will not be that bad.

Interest charges become a problem when you keep a balance on your credit card for more than a few months or when it takes longer than expected to pay off a loan. If you can pay off your balances quickly on unsecured loans, sky high interest rates will not be a problem.