7 Interesting Facts About Loan Interest

loan interest

When taking out a loan, many lenders will charge ‘interest’ fees.

These are extra fees that you have to pay on top of your repayments in exchange for using their service. 

The amount you pay in interest varies depending on the lender and various other factors.

By understanding how loan interest fees are determined, you can often find ways to pay less, saving you money in the long run.

Below are just a few facts about interest fees that could be interesting to know.

The higher your credit score, the lower your interest rates

Your credit score is a big factor when it comes to determining the interest rates you’ll pay.

Customers with a low credit score are typically seen as higher risk and therefore have to pay more for the service of taking out a loan.

Customers with a high credit score are seen as more trustworthy when it comes to paying back loans and therefore tend to have access to much lower interest rates.

If you want to start paying lower interest fees for loans, it could be worth taking steps to improve your credit score.

Paying bills and debts consistently on time will usually help you to build a good credit score, but there are other fast things you can do to improve your score.

You can also look into credit builder programs to help boost your credit. 

Bear in mind that some low credit lenders may charge less than others, so it’s always worth shopping around for loans when you have a low credit score.

I recommend comparing broker services on:

The shorter the term, the lower your interest rates

In most cases, you’ll pay less interest overall when taking out a short-term loan as opposed to a long-term loan.

Most people opt for long-term loans because it means smaller instalments.

However, you could end up spending double the amount in interest fees.

Consider whether you really need to take out a long term loan.

By cutting back for a few months, you may be able to afford a short term loan and you’ll save money overall. 

Interest rates typically increase with inflation

During periods of high inflation, interest rates on loans will typically rise more drastically.

If you’re paying a loan with a variable APR, you should therefore be prepared for your interest rates to go up during these periods.

Refinancing early could be sensible during these periods.

Look for fixed-rate loans that will not change year after year. 

Some credit cards have multiple interest rates

Credit cards are a form of borrowing that work much like loans but with a limit that you can keep borrowing money towards.

A lot of people don’t realise that some credit cards have two interest rates – one for purchases and another for cash advances.

These are both worth comparing so that you know how much you’re likely to spend depending on how you use your credit card. 

Cash advance interest fees are often more expensive than purchase interest fees.

Overdrafts and cardless lines of credit are sometimes better for withdrawing cash. 

0% interest cards often aren’t 0% for long

Some credit card providers like to lure in customers by offering 0% interest rates.

If this sounds too good to be true, it’s usually because it is – the 0% interest rates usually only last for a few months to a year, after which you may pay a variable rate.

If you’re not careful, you could end up paying high-interest fees once the 0% interest period is over. 

Always check the terms and conditions of these cards carefully before applying for them.

Paying off your loans early can save you money in interest

Many lenders allow you to pay off your loan early.

By paying fewer instalments, you’ll pay less money in interest in the long run.

Some lenders may even lower your interest fees for the remainder of the loan if you pay some money back early.

Just be wary that not all lenders will reward you for early repayments.

In fact, some may charge early repayment fees – read your loan agreement terms to make sure that this is not the case. 

You can refinance to lower your interest rates

As briefly mentioned already, it’s possible to lower your interest rates by refinancing.

This means taking out a low-interest loan to pay off a high-interest loan.

You’ll save money in the long run by not having to continue paying high-interest rates. 

As you’ll be essentially paying off your current loan early, you should make sure that there are no early repayment fees to factor in before refinancing – the money you save from switching to another loan needs to be worth any early repayment fees that you may have to pay.