# What is an interest rate and why should it be low?

Knowing this type of interest will save you from problems in your finances

You may not be an expert on banking issues, but what you should clearly know to avoid getting into serious trouble is the meaning of an interest rate. What is an interest rate and why should it be low? Now we will make it clear.

An interest rate is a percentage that you have to pay to the bank if you get a loan, it even works the other way around where the bank has to pay you if you open a checking or savings account. In this article we will focus on the interest rates of the loans, since knowing this type of interest will save you from problems.

## Interest Rate on Loans

The Annual Percentage Rate (APR) is interest paid to borrow money. If the monthly interest rate of a loan is 2% APR, this means that you will have to pay \$2 dollars for every \$100 that you obtained from the loan. However, this can be even more complicated to calculate when the interest is variable and not fixed.

## Variable Interest

When a loan indicates that it has variable interest, this means that the interest (the amount you will have to pay for the money borrowed) could change at any time during the life of the loan. The interest could go up and you would have to pay more money, or on the contrary, it could go down and you would pay less money in interest.

## Fixed Interest

If it is fixed, the interest will not change during the term of the loan and thus you will know in advance how much you will have to pay. You can even decide if the loan suits you or not. Since having a fixed interest, you will know how much you will have to pay monthly and this payment will not change during the term of the loan.

## Loan Terms

In the same way, you should know that the longer the term to pay the loan, the more you will pay in interest, even if the monthly payment is lower. For example, if you have a loan of \$10,000 dollars with an interest of 4.5% APR, for a term of 10 years, you would have to pay \$103.64 monthly. If we multiply \$103.64 by 10 years, you would pay a total of \$12,436, or \$2,436 in interest.

However, if the loan of \$10,000 (with the interest rate of 4.5% APR) you change the term to 5 years, the monthly payment would be higher, \$186.43. However, in the end you would pay less money in interest, \$1,185.

It is important that you keep in mind that obtaining a loan with a low interest and for a short term could help you save thousands of dollars. However, in order to get a low interest loan you would need to have a good credit score.

### Some banks that offer low interest rates are:

• LightStream. LightStream offers an interest rate of 3.99% to 16.99% APR for personal loans, with automatic payment. The interest rate of the loans is fixed and you can use the loans to pay off debts, buy a car, remodel the house, etc.
• Sophie. You can get a personal loan with a fixed interest from 5.99% to 16.99% APR with automatic payment. Sofi’s personal loans have no late, early, or origination fees.