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How much is charged as interest in lending money?

2 minutes minutes read

Every customer that applies for a loan gets a different rate. Read more to understand why:

Why is the interest different for each customer?

  • Amounts
    • Loan amount: The bigger the loan, the bigger the interest to pay. The amount of interest you’ll have to pay will be different based on the amount of the loan you get.
    • Repayment amount: For the lender, the risk is reduced if you pay a larger amount every scheduled payment, so the interest you pay might be less if the repayment amount is larger.
  • Loan term: If you apply for a long-term loan, the interest you pay might be larger because the risk of not paying the loan is bigger. On the other hand, if you apply for a short-term loan, the interest might be lower.
  • Schedule: Usually loans are repaid on a monthly basis, but there are certain times that the repayment schedule is set in another frequency. In this case, the sooner the payments are scheduled, the less you will pay on interest.
  • Credit score: As you might have imagined, your credit score has a major impact on the interest you will pay on the loan. Usually, people with better credit scores get better interest rates, which means that they pay less interest at the end of the loan. This happens because they are considered “trustworthy” people.

Tips on getting better rates

  • Credit score: You should aim to improve your credit score, since it is a good practice to have a healthy credit history. Some good habits are: paying off your balance every month, not missing payments, and not applying for various credits and loans at the same time.
  • The total amount of debt: Be careful with the amount you owe. A ratio called “Debt to Income” (DTI) determines how much debt you’ll have to pay each month as a percentage of your monthly income. A lower ratio means a better interest rate.

In conclusion

Good habits give great performances. If you create healthy credit habits, you’ll pay less interest on your loans. Also, don’t forget to always compare all your options so you can choose the best interest rate.

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Arturo Mendez

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