So chances are you’ve had to borrow money at some point in your life. Either to buy a car or a house or maybe you get a department store card to buy furniture. There are some things you should know about loans before you borrow money again.
First, you should understand how your interest rate works. There are two terms that are similar but their differences are worth noting. APR stands for annual percentage rate. This is the amount of interest you would pay if interest was only applied once per year. The other figure is annual percentage yield. This number accounts for the fact that interest is calculated more frequently than yearly.
So if interest is calculated monthly for example, 1/12 of the APR is applied each month, since there is a small of interest on the interest, this effects the entire amount that is applied. Because of this the APY is a more accurate representation of the total amount of interest you will pay.
Understand how to set the length of time to repay your loans, to obtain payments you can afford and know if there are any penalties for early repayment. You may currently be able to afford to pay back a car loan in 36 months, but what if your circumstances change? It may be a better idea to borrow money under 48 or 60 month terms to give yourself some leeway.
Remember, if you aren’t charged any penalties for early payment you can always repay in the original 36 months you planned. Although you might get a slightly lower interest rate for shorter loan terms, there is additional risk with this strategy as well.