Power of Interest

The cost of a loan is determined by the annual percentage rate (APR) also known as your interest rate that the lender offers you, and the length of time you take to repay the loan. However, you may be able to find a loan at a better rate if you investigate what various lenders are charging before you apply.

What if you don't pay on-time? In many cases, you may have to pay a late fee if your payment arrives after the payment due date. You can also expect to be penalized if you send a payment check that bounces. Failing to live up to the agreement is called defaulting on the loan. The lender may have the right to repossess, or take back, and sell the property you put up as collateral in a secured loan.

Lenders may also impose a stiff penalty if you default. And, if they hire a collection agency or lawyer, you'll have to pay for those services, too.

Another way lenders can collect if you default is by setting off, or taking the amount you owe from any checking or savings account you have with the lender.

Car Loan Example

  • If you have good credit: A $15,000 car loan at 2% for 4 years costs $325.43 per month for principal and interest. After making all 48 of the payments (12 months times 4 years), the total paid is $15,620.64.
  • If your credit is impaired: A $15,000 car loan at 12% for 4 years costs $395.01 per month for principal and interest. After making all 48 of the payments (12 months times 4 years), the total paid is $18960.48.
  • The difference: Thats a difference of $3,339.84 in additional interest you will pay over the life of the 4 year car loan if your credit is impaired and youre charged a higher interest rate on your loan.

Terms to Know

Interest Rate: the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Annual Percentage Rate (APR): the annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Loan Default: the failure to promptly pay interest or principal when due. Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt.