Let’s dive into the most common types of interest rates that could apply to your loan.
Just as it sounds, these rates are fixed over the lifetime of the loan. That means you don’t have to worry about your loan officer changing your interest rate after your agreed-upon terms. This helps you know up front exactly the amount of interest you’ll owe on a loan.
These rates change according to a prime interest rate (like the United States Prime Rate). Your loan will change according to your loan terms (every year, every six months, etc.). This can be a great option if you get a good rate on a short-term loan, but it can pose great risks. If the prime rate skyrockets, say hello to much higher interest rates.
Your APR includes not only interest rates but also all of the fees you’ll have to pay on a loan (like origination fees, closing fees, etc.). Lenders will calculate APR based on things like the loan type, total amount of the loan, your interest rate, your repayment terms, and fees associated with the loan. It’s meant to offer you a more comprehensive view of the cost of your loan. However, the actual amount you pay on a loan per month is based on your interest rate and not on your APR (remember, APR includes all fees that have varying deadlines).
APRs can be a useful tool for comparing loans. However, they can also be a bit misleading, especially for shorter-term loans, because your fees will be higher when you have to pay the loan back quickly. Plus, some loans have a prepayment penalty, which is a fee for paying off your loan earlier than the term agreement. Be sure you understand all of the terms of your loan when deciding if it’s a good option.