An interest rate is the percentage of the loan amount you must pay as the loan’s cost. This is the reward that a lender gains from offering you a loan. Usually, you will need to transform this percentage to a sum that you will discharge throughout the loan agreement. 

For instance, if you intend to loan $100 000 from a lender. And the cost of the loan is 6%, then you will need to convert the percentage to a sum. In this case, you will need to pay $6 000 as interest, provided it is a one-time interest rate. 

Usually, the interest rate you have to pay depends on loads of factors. These factors include:

  • Your lender
  • Type of loan, whether it is secured or unsecured 
  • Credit score 
  • Other risk factors such as the amount you want to loan and the loan duration

Types of Interest Arrangement 

If you decide to take a loan, then you cannot avoid paying interest. However, this interest can take two forms.

Fixed Interest

Under this category, your interest rate is static and does not change during the loan agreement. You maintain the same rate you agreed to at the beginning of the contract.

This interest arrangement supports certainty as you maintain the same payment all through. In turn, it can help you retain more financial stability.

Variable Interest

Under this category, your interest rate is not static. Instead, it varies based on the prevailing market rate. 

As such, it can drop or reduce. In a case where it declines, you enjoy a reduced cost. Where it increases, you have to pay higher. However, it is impossible to tell when it will increase or reduce. 

Interest Rates for Bad Credit Loans

The interest rate you pay depends on your credit score. Generally, this is because most lenders set the interest rate based on the risk they have to bear in the loan arrangement. Then, where the risk is higher, they want to receive higher compensation for taking the risk through an increased interest rate.

When you have a bad credit score, it means you have not been diligent with your past financial obligation. The reality is that you might not be diligent with your repayment obligation under the new arrangement. 

As such, the lender recognises that they bear more risk and charge a higher interest rate. So, with a bad credit score, be ready to pay higher interest rates if you must obtain a loan.

Frequently Asked Questions 

What Is A “Good” Interest Rate?

A good interest rate represents a competitive rate compared to other rates for the same product from different institutions. For instance, an 8% interest rate will be reasonable when other lenders offer 8%. Alternatively, it would be not good where other lenders offer 6.5%. 

Who Determines the Interest Rate?

Typically, the lender determines your loan’s interest rate after considering the risk that comes with lending you the agreed sum. However, they usually provide a range that you can assess as you start your loan journey.