by Jeff
12. September 2011 04:19
Not a lot of people completely understand the reason behind interest rates and how dreaded it is for the average payee. More often than not, people overlook these rates and wonder how come it’s taking them a substantially longer time to pay off their debt or at times why the amount their paying off seems to be piling up. Therefore it is important for debtors and people who owe debt to completely understand interest rates to better inform people on how to keep track of their payments and efficiently schedule a payment plan. As the saying goes, better to pay sooner than procrastinate later.
Interest rate is the amount or sum involved in return for lending credit to someone. It’s “what’s in it for me, if I lend you money, a loan or even a housing mortgage” and in the lending business, it’s what keeps these people growing their assets. Typical interest rates (annual) range from 15-20% on usual credit cards. For loans with bigger and riskier type of transactions, it may be a bit higher. The lender would reserve the right to exercise discretion when it comes to lending his/her funds or assets so interest is a must.
Putting this down on paper, for a better view Interest rates affect the way payment goes to your debt or principal sum. An example is for a credit card payable of $1000 you’re charged with an annual interest rate of 20%, the minimum monthly repayment is 3% of the remaining balance. In this case taking the percentages, for interest of 20%, that would give us (1000*.2/12) $16.66 worth of interest. The minimum payment amount 1000*.03 gives us $30 for the minimum monthly payment and with an interest of $16.66 monthly making the minimum payment of $30 only gives you $13.34 going to the principal balance of $1000.
Having said this, a good rule of thumb when paying your debt with interest rate is to pay more than the minimum monthly payment. That way, you get to meet the “real” monthly minimum and at the same time satisfy the monthly interest rate that’s needed. You’ll notice that in a short span of time you would have paid off the total amount of the debt or loan and may even be shorter than the projected time span.
So the next time you go for a loan or credit card purchase, make sure you understand the fees involved and the interest rates for the funds/money you would be borrowing. Having an understanding of interest rates is wise spending and would benefit you in the long run. And avoiding debt from piling up starts from borrowing wisely and planning ahead.