Interest
What is interest?
Interest is a fee to the borrower for using the lenders money. This fee is usually an annual percentage of the principle, or amount loaned.
How does interest work?
Interest is calculated depending on the borrowers credit score, which is used to calculate the risk the lender takes. The interest rate determines what percentage of your loan you owe the lender, here are some examples of interest rates and loans...
- 6.8% interest on a $5,000 car purchase, paying $1,000 every month would mean you pay 6.8% of $1,000, or $68 in interest, every month.
I'm sure you can imagine how out of control this could get with major loans, say a house loan of $100,000 with 5% interest. How in the world could that be payed off? Say you decide to pay $2,000 a month. With interest, you're really dishing out $2,100 monthly. It would take four years to pay off this loan and end up costing you $4,800 more.
Risks of a Loan:
Not paying in full for a loan with interest is extremely risky, as the amount you don't pay not only is added to whatever you add on the next month, but the interest for that total payment is more than it would have been to pay it all of in the first place. This is related to revolving credit, and as your debt continues to revolve, the interest on said debt grows as well, because interest is calculated as a percentage of the total loan.
Sources: http://banking.about.com/od/howtobank/a/What-Is-Interest.htm
Interest is a fee to the borrower for using the lenders money. This fee is usually an annual percentage of the principle, or amount loaned.
How does interest work?
Interest is calculated depending on the borrowers credit score, which is used to calculate the risk the lender takes. The interest rate determines what percentage of your loan you owe the lender, here are some examples of interest rates and loans...
- 6.8% interest on a $5,000 car purchase, paying $1,000 every month would mean you pay 6.8% of $1,000, or $68 in interest, every month.
I'm sure you can imagine how out of control this could get with major loans, say a house loan of $100,000 with 5% interest. How in the world could that be payed off? Say you decide to pay $2,000 a month. With interest, you're really dishing out $2,100 monthly. It would take four years to pay off this loan and end up costing you $4,800 more.
Risks of a Loan:
Not paying in full for a loan with interest is extremely risky, as the amount you don't pay not only is added to whatever you add on the next month, but the interest for that total payment is more than it would have been to pay it all of in the first place. This is related to revolving credit, and as your debt continues to revolve, the interest on said debt grows as well, because interest is calculated as a percentage of the total loan.
Sources: http://banking.about.com/od/howtobank/a/What-Is-Interest.htm