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What Are Interest Rates?

If you’ve ever borrowed money, then you’ve likely been hit with interest rate charges. If you own a credit card, you should have heard of interest rates, and have likely ended up paying out quite a bit of money to cover their costs. However, do you really understand how interest rates work?

At first glance, interest rates may seem simple and straightforward, but the details can get confusing when you delve into the fine print. In addition, there are different types of interest rates: simple, compound, annual, etc., making it even more difficult to fully understand the way that interest rates truly work, and what they’ll end up costing you.

The differences between these types of interest rates are vital to making a good decision about which loan will work best for you, so it’s important that you fully understand how interests rates will affect your cost of borrowing money before you sign the dotted line.

This Blog post introduces the different types of interest rates, discusses how they impact your cost of borrowing money, and details how to find out whether or not you’re getting a good interest rate from your lender.

What is an Interest Rate?

Interest rates determine the cost of borrowing money. Think of them like this: a lender allows you take out a loan for some set amount of money, but they need to make money somehow, and that’s where interest comes in. It’s the interest rate that makes lenders money, because the interest rate ensures that you’ll pay back not just the amount of money borrowed, but that amount plus the interest you’re being charged for the convenience of borrowing the cash.

Interest rates can vary wildly between different types of loans (credit cards vs. home mortgages vs. car loans vs. payday loans vs. car title loans, etc.), but in the end they all determine the same thing: the amount of money you’ll end up paying for being able to borrow it in the first place.

Simple Interest Rate

The simple interest rate (also sometimes referred to as the “nominal interest rate”) is the simplest type of interest. Simple interest determines your borrowing costs, and is calculated as a percentage of the principal balance of your loan.

The formula to calculate simple interest is:

Interest = Principal x Rate x Time

For example, if you have a loan for $1,000 and your annual simple interest rate is 10%, then you would need to pay back $100 in interest, in addition to paying back the original $1,000 you borrowed.

A further example of simple interest is accrued interest. If you do not make any payments on your loan for 2 years, then the formula changes to:

1000 x .10 x 2 = $200

By this point, the total amount you will owe would be $1,200 (including $200 from interest charges).

Accrued simple interest will be based on the original amount of your loan, without any added fees. The thing to keep in mind is that no matter how many months or years you go without paying your loan, the amount of interest you will be charged will be based on the original $1,000 that you borrowed.

One important fact that should be pointed out is that while simple interest rates are often based on an annual percentage (annual percentage rate, or APR), they may also be broken down into monthly or quarterly percentages.

Compound Interest Rate

A compound interest rate is much more common than a simple interest rate. Compound interest does not only add onto the original amount of your loan, it also adds onto interest and fees that have already been added to the original amount you borrowed.

What does that mean? If you aren’t paying enough to cover your loans principal balance and interest charges each month, then the amount of money you owe could continue increasing even if you’re making payments.

The formula for compound interest is as follows:

Amount (after “n” years) = Principal x (1 + Rate) / ^ n number of years

As you can see, calculating compound interest is a bit more complex than calculating simple interest. As an example, let us use the $1,000 loan that was used in the earlier example:

1000 x (1 + .10) / ^ 2 = $1,210

With compound interest, you will end up paying an extra $10 more than you would have with a simple interest rate, because you are paying interest on interest, in addition to interest on principal.

Compound interest is the reason why your loan balance grows so quickly.

A compound interest rate can make it difficult for you to pay off your entire loan because a lot of payments you make each month (or according to your payment schedule) may only apply to the interest that you owe, rather than hitting your principal balance.

In fact, if you aren’t paying enough each month to cover that month’s new compound interest costs, then your debt may end up growing, even while you’re making payments!

The example shown above assumes that interest fees are added once per year. If you are stuck with an interest rate that is compounded on a quarterly or monthly basis, your loan balance will grow even more quickly. To determine interest on a quarterly or monthly basis, you can use the following formulas:<

Quarterly: Amount = Principal x (1 + (Rate / 4) )^ 4

Monthly: Amount = Principal x (1 + (Rate / 12) )^ 12

Many loans come with compound interest rates, so you’ll need to plan ahead and determine which type of interest any loan you may be taking out comes with. It’s important to ensure that you’ll have the necessary funds to pay off your loan as quickly as possible, or you could end up getting stuck in a debt cycle that continues getting worse and worse over time.

When you have a loan with compound interest, you should aim to pay at least a little bit more than the minimum amount of money required in each payment, because that will be the best way to save money over the course of your loan (by reducing the amount of time your loan has to rack up additional interest costs).

Interest Rates and Types of Loans

Now that we know how interest rates work, let’s look at how interest rates work with three of the most common forms of loans: credit cards, home loans and auto loan. This will make it abundantly clear how interest rates affect each form of borrowing.

Credit Card Interest Rates

If you have never had a credit card, then you may be wondering what the real cost of a credit card will be.

Before accepting that credit offer that you got in the mail, you will want to look at the annual percentage rate for the card, which is the projected yearly interest rate the credit card company is going to charge you for the convenience of borrowing their money.

Some credit cards are relatively affordable, while others simply cost way too much money to be worth the trouble.

Many lenders use a daily periodic rate to calculate interest charges on a credit card account whenever their customers carry a balance (meaning whenever you have borrowed money that isn’t already paid back). The formula for this daily rate is simple, it is your credit card APR for new purchases divided by 365.

Your average daily balance and the number of days in your credit card’s billing cycle are other important factors in determining your monthly finance charge. The monthly finance charge is the amount you pay for carrying a balance on your credit card on a monthly basis.

If you have a good credit score, you may be able to get a credit card with a 0% interest rate for several months. This means that you’d be able to borrow money without paying any finance charges for at least a few months (other than a potential transfer fee of about 3 or 4%). With that said, keep in mind that the 0% offer is LIMITED, and will run out after whatever period the credit card company offers.

Once that introductory period ends, and your interest rates kicks in, be aware that you may end up paying a dear cost for every dollar you borrow from the credit card company.


Mortgage Loan Interest Rates

When it comes time to purchasing a home, most people can’t afford to pay for it all up front. This is where mortgages come in, and it’s the way that the vast majority of homeowners were able to afford their house’s purchase.

Shopping for the best interest rate on a potential mortgage is one of the most important pieces of the puzzle toward keeping your finances in proper order. Since houses cost so much money, the difference between getting an interest rate of 5% vs. 4% can mean costing you (or saving you) tens of thousands of dollars over the course of your loan.

When shopping for the best mortgage, you’ll need to ask each potential lender about whether their interest rates are fixed or variable, and you’ll have to determine which type of rate works best for you.

Fixed interest rates are those that do not change over time, while variable rates are started at some arbitrary number, then allowed to fluctuate based on the prevailing interest rate at the time the rate is allowed to change.

Be careful about signing up for variable interest rate loans, because they can end up costing you far more money than you might have thought in the first place.

Most mortgages also come with origination fees (the cost to set up the mortgage) and other costs, like mortgage insurance, appraisal fees, filing fees, etc., in addition to interest, so you can’t simply compare interest rates between lenders to determine who’s offering you the best deal.

Just remember, even if one lender wants you to pay a little more up front, but they’re offering you a better interest rate on the loan, it may be worth the short-term higher cost to save lots of money over the lifespan of your loan.

Unfortunately, the only way to figure out which mortgage offer makes the most sense for you (by saving the most money) is to run the numbers and calculate your short and long-term costs.

Before you sign any paperwork, be sure that you fully understand how all the fees and costs work, so you can ensure that you’re getting the best possible deal.

Auto Loan Interest Rates

For the purposes of calculating your monthly car payment, many auto loans tend to use the simple interest rate.

What’s that mean? It means you’ll only accumulate interest based on the original amount of money that you borrowed to pay for your car (the principal balance of your loan).

If you’re trying to decide between two loans and one comes with a simple interest rate, while the other comes with a compound interest rate, there’s a good chance that the simple interest rate will be your cheaper option in the long run.

How to Deal with Interest

No matter what type of loan you get, what type of interest rate you’re being charged, or what the actual percentage attached to your interest rate might be, the best way to deal with interest will be to pay off your debt as soon as possible.

Remember, the sooner you pay off your debt, the less time it has to accumulate additional costs due to interest accrual.

Each time you issue a payment for any form of loan, try to pay a little more than the required amount. This will ensure that you’re cutting through interest charges and hitting more of your principal balance each month, getting you out of debt faster, and at a lower cost.

Plus, making all your payments on time (and paying back your loan earlier than you were required to) is a great way to improve your credit, because your payment history is an important factor that helps determines your credit score.

Auto Title Loans

If you need to borrow money to purchase a home, a new (or used) car, then your best bet for borrowing money will probably be to take out a mortgage loan or an auto loan.

However, if you need to raise money for other needs (like to pay the rent, to take a vacation, to buy presents for the family, or to do anything else), then you may want to consider car title loans.

If you don’t have perfect credit, and you’re in a hurry to raise lots of money quickly, then auto title loans might be your most affordable way to get the cash you need.

Car title loans (also referred to as vehicle title loans, pink slip loans, car equity loans, and other similar names), are a type of secured loan that lets you turn the equity you own in your car into instant cash. Car title loans are fast, simple and convenient, especially when you choose to borrow from City Loan!

Here at City Loan Long Beach, our title loans offer the following important advantages:

  • Our car title loans are relatively easy to qualify for, and are sometimes even available to people with absolutely terrible credit scores (including repos, defaults, bankruptcies, etc.)
  • The amount of money you’re able to borrow from City Loan is based on the equity value of your vehicle (the more your vehicle is worth, the more you can borrow)
  • Our auto title loans don’t require you to sacrifice the use of your vehicle while you’re paying off the loan (as long as you keep making your monthly payments, we won’t restrict your driving!)
  • Our vehicle title loans can be used to pay for any costs, from using the money as a down payment on a new property to paying for a dream vacation

Our title loans are also extremely simple! Here’s how they work: you give us temporary possession of your car’s title, and in return we give you a cash loan based on the vehicle’s value.

After you’ve paid back your loan (plus interest costs) we’ll return your car’s title to you name.

That’s it!

City Loan Long Beach Can Help

If you need to raise money for something other than purchasing a house, paying for school or buying your next vehicle, then auto title loans should rank right at the top of your list of available funding opportunities.

There’s a reason why we’re well known as the best lender for people with poor credit – even if you’ve already been told “No” by other lenders, we may still be able to get you the cash you want within minutes of receiving your request.

Fill out our simple online application form, or give us a call at 1-888-238-9085 to get your own fast, easy and convenient car title loan today!


Find a City Loan Near You

City Loan offers the best auto title loans in CaliforniaUtahArizonaMissouriNew MexicoTexas and South Carolina. Our service area is constantly growing, so even if you don't see your state on the list, it might be there soon! Get in touch with one of our representatives to find out your options.

And if you're in Long Beach, you can stop by our main office to see how we can help. You can find us easily at: 

3431 Cherry Ave,
Long Beach, CA 90807

Nobody else in the industry can offer the type of service you'll get at City Loan Long Beach. We take the time to learn about our customers so we can help them find the right car title loan. Stop by our Long Beach location or give us a call to find out for yourself. You won't be dissapointed.