You’re searching for a home mortgage, and you want the best interest rate. But how exactly does that interest rate affect your loan?
Think of interest as the price you pay for borrowing money. If your loan is subject to compound interest, that means your original, or principal, loan balance will grow at a certain percentage of its current balance every day, in addition to any interest balance you earned previously on your debt. In other words, your balance not only grows interest, your interest also gains interest.
Your interest rate dictates how quickly your debt will grow. For example, a $1,000 loan, borrowed at a 3.2% interest rate and compounded quarterly, which means interest is added to your principal four times a year, becomes $1,032.39 in debt within one year.
Here are two things you should keep in mind when looking at an interest rate:
- You Will Pay Back More Than You Borrow: This is why it is important to pay off loans and credit card debt as quickly as possible. In order to do so, make sure you’re paying off more than the minimum payment each month. If you cannot find room in your budget to keep up with your repayment goals, consider starting a second career to help you pay more at once, and battle future interest.
- Interest Can Help You: Interest should not only be considered a debt deterrent; it can also be a savings booster. For example, you can earn interest from savings and investment accounts. This growth has the potential to benefit you in the long run!
Make sure you borrow responsibly and focus on minimizing your debts. If you emphasize saving, rather than spending, you will appreciate financial security for years to come.
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