What You Need to Know about Interest Rates
What You Need to Know about Interest Rates – It’s been said that “if you understand compound interest you earn it, if you don’t understand it, you pay it.” Interest rates fluctuate frequently and what you don’t know can hurt your wallet, savings, and credit. Whether you’re looking to make a large purchase, utilize credit cards for spending, or add to retirement savings or investments, interest rates can affect your current and future finances.
What is financial interest?
Obtaining a loan for a large purchase (house or car) or using a credit card for expenses means you’re borrowing money. Interest, in the form of percentage or designated dollar amount, is the price for the benefit of borrowing said funds.
Additionally, the terms of the interest rate are often dependent on how much time is given to pay back the loan in full: months or years.
However, the cost of paying interest also means paying back more than the initial loan. And, depending on the percentage rate of interest, the added costs can add thousands of dollars to the original loan- especially if the sum of the loan/credit requires several months or years to pay off.
A higher interest rate typically results in a higher monthly minimum payment, with a lower percentage of the payment going towards the principal (original loan amount) balance. Conversely, a lower interest rate typically reduces the minimum payment and increases the percentage applied to the principal balance.
Interest Rates: Examples
For example, a $100,000 30-year mortgage loan with a 7% interest rate would result in an approximate $665/month payment… a final loan payback of approximately $239,400 at the end of the 30-year period.
The same $100,000 30-year mortgage loan with a 6% interest rate would result in an approximate $600 monthly payment… or $216,000 at the end of the terms.
Likewise, carrying a monthly balance on credit cards ensures you’re paying significantly more than the original product/service cost. Yet, paying off credit card balances in full each month incurs no additional interest fees.
When it comes to investments and savings, though, higher interest rates mean you’re earning money. Though the monthly increment may seem minimal, over months and years the rate of return can build significantly.
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Taking a broader look at your current finances and future financial goals can help you make financial decisions that fit your saving & borrowing needs.
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Call Crescent Wealth Partners today at 941.923.3663 and visit us at crescentwealthpartners.com for additional information and to meet our team of financial advisors ready to assist your planning goals.
Want to learn more about this topic? Read Understanding Interest Rates and Your Financial Situation
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