Here’s how interest works and how to keep your payments low

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Interest payments are almost inevitable for adults. Credit cards, mortgages, and student loans all charge interest on overdue balances, and the money spent can add up quickly.

For those new to the world of interest rates or just in need of a refresher, here’s an explanation of the main types of interest rates, when you’ll see them, and the best ways to try and lower your mortgage payments. global interests.

Good news first

Despite the negative connotation you may have with the term, it is possible to receive interest payments yourself. There are interest-bearing savings accounts and other financial tools to make your money grow. you. These accounts can often be useful to offset expenses you have, such as a mortgage or student loan, throughout the year.

Receiving interest is exciting, but keep in mind that you will owe the majority of the interest you incur to a lender. Here’s a look at how interest works and the different types you may come across.

How interest works

Interest is simply an additional payment owed on top of the principal to a lender in exchange for access to a line of credit. Interest charges vary widely depending on the type of loan, but a percentage is taken from the principal balance and is due with each bill. Here are the main types of interests you should be aware of:

preferential rate

While you will probably never get the prime rate yourself, it is the basis of all other types of interest and is often mentioned in financial reporting programs. Prime rates are granted to preferred customers and are tied to federal bank rates – so it is essential to be aware of its fluctuations.

Fixed interest

One of the most common types of interest is the fixed rate. This means that your percentage will never change, providing stability for borrowers and lenders.

Floating rate

As the name suggests, variable rate interest is subject to the market and will change throughout your loan. Despite the lack of stability, they can be advantageous for borrowers if interest rates fall in the years to come.

Annual percentage rate

Also known as APR, this is a way that lenders report the total cost each year of the loan to a borrower. This number includes fees and other costs associated with borrowing, so it is not strictly the total interest added up each month.

The interest rate is the fees you pay to take out a loan from the lender. Home mortgages, for example, will include closing costs, personal mortgage insurance, and other charges in the annual percentage rate, so using the APR can provide a much clearer picture of your obligations.

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How to keep interest payments low

While interest rates are everywhere, there are some easy ways to try and reduce the monthly costs associated with them:

Don’t wear sales

While it’s probably not possible for large sums like mortgages and student loans, paying off your entire credit card balance each month is the safest way to avoid interest. Without the monthly deferral, you’ll be saying goodbye to credit card interest charges.

Multiple monthly payments

Most credit cards calculate interest charges based on the average daily balance. Making payments every two weeks instead of once a month is a great way to lower your interest costs and average.

Pay higher rates first

If you have balances on more than one credit card, first eliminate the balance from the card with the higher rate. Paying lower interest charges each month will allow you to pay off the principal more quickly.

Debt consolidation

Buying lower rates and transferring credit balances to a card is another useful tip for lowering interest charges. This option is usually reserved for people with above average credit, and there are often additional fees associated with the balance transfer.

Many companies offer extended 0% interest periods for debt consolidation, so the transfer fees pay off quickly. If you can pay off your balance before the 0% expires, you can save a lot of money in the long run.

Understanding interest rates can simplify financial decisions and help you reach your goals. Make sure you read the fine print of any loan or credit agreement you sign to know exactly what type of interest you will pay and at what rate.

FYI Finance is presented by 1st Security bank.

AT Washington’s 1st security bank, we take a personalized and personal approach to your financial well-being. We live in the communities we serve, which is why our branches offer solutions tailored to their communities. We believe relationships make the difference, which sets 1st Security Bank apart.

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