## Impact Of The Weighted Average

There are several consequences of the formula for calculating the weighted average.

A loan with a higher loan balance will have a greater impact on the weighted average than a loan with a lower loan balance. The use of a weighted average causes loans with higher loan balances to contribute more to the overall weighted average.

The weighted average will always be between the highest and lowest interest rates on the loans included in the consolidation loan.

Thus, if a lender claims that the weighted average reduces the interest rate on a loan, that is misleading. The weighted average not only reduces the interest rate on the loan with the highest interest rate, but it also increases the interest rate on the loan with the lowest interest rate, unless all loans have the same interest rate.

The weighted average more or less preserves the cost of the loans.

Since a consolidation loan does not really change the cost of the loans, it does not save money.

The only way to save interest on a consolidation loan is by choosing a shorter repayment term. A shorter repayment term yields a higher monthly loan payment which pays off the debt quicker, thereby reducing the total interest paid over the life of the loan.

However, this only applies to federal direct consolidation loans. Borrowers who refinance student loans with a private lender may be able to lower their interest rate.

## What Is Interest Rate

Interest rate is the amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal, or original amount borrowed it can also be described alternatively as the cost to borrow money. For instance, an 8% interest rate for borrowing $100 a year will obligate a person to pay $108 at year-end. As can be seen in this brief example, the interest rate directly affects the total interest paid on any loan. Generally, borrowers want the lowest possible interest rates because it will cost less to borrow conversely, lenders seek high interest rates for larger profits. Interest rates are usually expressed annually, but rates can also be expressed as monthly, daily, or any other period.

Interest rates are involved in almost all formal lending and borrowing transactions. Examples of real-world applications of interest rates include mortgage rates, the charge on a person’s outstanding debt on a credit card, business loans to fund capital projects, the growth of retirement funds, amortization of long-term assets, the discount offered by a supplier to a buyer for paying off an invoice earlier, and much, much more.

**Simple vs. Compound Interest**

**Fixed vs. Variable Interest Rates**

## Uncontrollable Economic Factors That Affect Interest Rate

There are many factors that affect what interest rates people get on their mortgages and auto loans. Although these largely cannot be controlled, having knowledge of these factors may still be helpful.

**Economic Policy and Inflation**

In most developed countries today, interest rates fluctuate mainly due to monetary policy set by central banks. The control of inflation is the major subject of monetary policies. Inflation is defined as the general increase in the price of goods and services and the fall in the purchasing power of money. It is closely related to interest rates on a macroeconomic level, and large-scale changes in either will have an effect on the other. In the U.S., the Federal Reserve can change the rate at most up to eight times a year during the Federal Open Market Committee meetings. In general, one of their main goals is to maintain steady inflation .

**Economic Activity**

**Unemployment Rate**

When the unemployment rate is high, consumers spend less money, and economic growth slows. However, when the unemployment rate is too low, it may lead to rampant inflation, a fast wage increase, and a high cost of doing business. As a result, interest rates and unemployment rates are normally inversely related that is, when unemployment is high, interest rates are artificially lowered, usually in order to spur consumer spending. Conversely, when unemployment within an economy is low and there is a lot of consumer activity, interest rates will go up.

**Supply and Demand**

**Also Check: Savings Account Interest Rate Calculator **

## Factors That Determine Car Loan Interest Rates

To get an idea of what interest rates are available to you, you can prequalify with several lenders. Its recommended that you prequalify with at least three before heading to a car dealership. Your auto loan rate is determined by a number of factors, including:

- Banks and lenders have systems in place to determine your creditworthiness and to set your rates. The lower your score, the higher your rate.
**Loan term.**Generally, longer loan terms result in higher rates. It also means a higher amount paid over the life of the loan but can carry lower monthly payments.**Down payment.**Making a large down payment means you are borrowing less, and that you are less likely to become upside down on your loan.**Car age.**Typically, the older the car, the higher the rate.**Work and education experience.**Some lenders now look at your job history and education when determining your interest rate, which means you could qualify for a decent rate without the best credit score.

## Demand For Riskier Home Loans Is High As Interest Rates Soar

- The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.81% from 6.75%
- Mortgage applications to purchase a home fell 2% for the week and were 39% lower than a year ago.

Mortgage demand dropped again last week as rates climbed higher, but one type of loan is attracting borrowers. Adjustable-rate mortgages, or ARMs, which offer lower rates, are seeing renewed demand after getting very little interest over the last decade.

Total mortgage application volume dropped 2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index, a consequence of surging rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.81% from 6.75%, with points increasing to 0.97 from 0.95 for loans with a 20% down payment. That is the highest rate since 2006.

“The news that job growth and wage growth continued in September is positive for the housing market, as higher incomes support housing demand. However, it also pushed off the possibility of any near-term pivot from the Federal Reserve on its plans for additional rate hikes,” wrote Michael Fratantoni, MBA’s chief economist in a release.

**Read Also: Manufactured Home Interest Rates 2021 **

## Shop Around For The Best Deal

As with other types of loans, the overall cost of a car loan comes down to one major factor: APR. Knowing what APR each lender will charge can help you find the car loan with the lowest overall cost.

Dont just focus on the number, though. Look at the lenders requirements and restrictions too. You can check this on the lenders website or using its quote form or application. You may also want to look at reviews.

Remember that the interest rate listed on the main page is likely the starting rate. To get that low rate, you will likely need excellent credit of 740 or higher and a stable income.

## How To Calculate Interest Rate

Most Americans have a relationship with interest: accrued on savings, owed on student loans or compounded in a 401k. But how is interest calculated? You likely know your rate , but how does that number turn into money gained or owed?

Math doesn’t need to be your strong suit to follow along and learn what is perhaps the defining element of a loan: the interest rate formula.

**Recommended Reading: Federal Reserve Hikes Interest Rates **

## How To Use An Interest Rate Calculator

To use an online loan interest rate calculator, enter the loan amount you want to avail in the pertinent field. Next, enter the rate of interest charged followed by the repayment period you wish to opt for. Lastly, click on the calculate bar to arrive at the results instantly. Using a personal loan interest calculator is just that simple.

## How Can You Reduce Your Mortgage Interest Costs

Buyers have two major decisions when borrowing money that can affect interest costs:

- Fixed vs. adjustable rates
- 15- vs. 30-year loan terms

Fixed-rate mortgages mean youll pay the same percentage of your principal in interest every month throughout your loan repayment. So if you signed for the loan at 3% interest, youll still pay 3% interest in 30 years.

Adjustable-rate mortgages provide an initial low interest rate for a set period of time after you borrow. This means youre paying less interest when your balance is at its highest. However, after those first few years, your interest rate will fluctuate every 6 months or annually based on the market rates. This can increase your initial interest rate by as much as 5%, so ARMs are best for people with higher incomes and those planning to move within a few years.

Buyers can also choose between a 15- and 30-year loan term, which is the amount of time youll pay monthly mortgage payments. Of course, buyers are welcome to increase their monthly payments to repay the balance ahead of their set loan term, but this may trigger prepayment fees from your lender.

When you decide between a 15- and 30-year mortgage, the APR costs and impact to your principal balance are factored accordingly, so youll pay off the entirety of your loan, fees and interest charges by the end of the term.

Your lender can provide the total expected cost between the two loan terms so you can make the decision that best fits your finances.

**You May Like: How To Calculate Car Payment With Interest **

## Examples Using Interest Rate Formula

**Example 1: If Sam lends $5000 to his friend and received $6000 after a year. Using the interest rate formula, find at what interest rate did Sam lends the amount to his friend?**

**Solution: **

Simple intrest =$6000- $5000= $1000

Time=1 year

Interest Rate = /

Interest Rate = /

Interest Rate = 20%

Therefore, Sam will take a 20% interest rate from his friend in a year.

**Example 2: James borrowed $600 from the bank at some rate per annum and that amount becomes double in 2 years. Calculate the rate at which James borrowed the money.**

**Solution:**

Simple interest =$1200- $600= $600

Time = 2 year

Interest Rate = /

Interest Rate = /

Interest Rate = 50%

Therefore, James borrowed the money at 50% rate.

**Example 3: What is the interest rate on principal amount 12000 in 2 years, if the simple interest is 1200?**

**Solution:**

Using simple interest rate formula,

The interest rate of a given amount can be expressed as,

Interest Rate = /

Interest Rate = /

Interest Rate = 5%

Therefore, the interest rate is 5%

## How Do You Calculate Simple Interest

Simple interest is based on your mortgage principal, or the total amount of money borrowed, and can be calculated with this formula:

**Simple interest = principal x interest rate x number of years **

So, if you borrow $100,000 with a 15-year term and 3% interest rate, your calculation would look like this:

**$45,000 = 100,000 x 0.03 x 15 **

This shows that youll pay $45,000 in interest while repaying this loan. Next, you can add the interest total with your principal to determine the total amount youll pay the lender, which comes to $145,000.

In real estate, simple interest isnt quite so simple. Your interest costs will be bundled with additional lender fees as an annual percentage rate . This includes administration costs, origination fees and more. Calculating the APR costs youll owe each month with your mortgage payment requires a different formula:

Luckily, you dont have to do this math yourself. Your lender is required to show you your loans APR, including all fees, scheduled payments and the total cost of your loan.

**Recommended Reading: Mercedes-benz Interest Rates 2021 **

## How Do I Figure The Interest Rate On A Loan

Most loans are advertised with a set interest rate, which can be fixed or variable over the lifetime of a loan. However, some loans are structured such that a fixed dollar amount is loaned at the beginning of the loan period, and another fixed dollar amount is due to service the loan at the end of that period. These loans can be compared with interest-based structures by calculating the interest rate that results in the amount due.

#### 1.

Divide the amount of the additional payment by the amount loaned to determine the simple interest rate. For example, consider a loan of $1,000, which must be repaid in one year with the amount of $1,300. This is $300/$1,000, or 30 percent per year, which is a hefty interest rate. However, if the loan was $10,000, and required a repayment of $10,300, that is an interest rate of $300/$10,000, or 3 percent per year, which is extremely low.

#### 3.

Determine the cost of a short-term loan by expanding it over the course of a year. For example, a payday loan store may charge $50 for a $1,000 loan, due in two weeks’ time. This is a rate of 5 percent for the two weeks, but once those two weeks are multiplied by 26 , the simple interest is shown to be 130 percent–a very expensive loan. If additional fees and interest are levied after the initial two week period, this interest rate can skyrocket even higher.

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## What Is Simple Interest How To Calculate It For Your Home Loan

Simple interest is a fixed charge based on loan principal, and its typically assigned as a percentage. Its a way of calculating how much you owe a lender for borrowing money. That cost of debt is called interest, and it can be determined via simple or compound interest formulas.

Mortgage lenders charge simple interest mortgage rates to borrowers to cover their expenses for paperwork, loan underwriting and other services. This interest is included in your monthly mortgage payments and is part of your expenses as a homeowner.

Its important to understand what simple interest is and how its calculated so you can get a more accurate estimate of your monthly mortgage payments before you submit an offer on a house.

**Also Check: Best Interest Rates For Savings Accounts **

## Identify How Much You Need To Borrow

Before you begin studying potential interest rates and loan qualification requirements, you must understand what a loan means with regards to your future. With a loan, someone provides you goods or services in exchange for a future repayment, presumably including some amount of interest to incentivize the lender to agree to the transaction.

The primary focus of the research phase should be personal. You will need to decide whether you actually need a loan prior to your first contact with a lending business. Your lender will be discussing countless potential transactions when you engage them in negotiations. While most major lenders provide expert analysis from quality loan professionals, they only make money by selling you their services.

Before you enter into such negotiations, you must identify exactly how much money you need to borrow. If you are taking out a personal loan to consolidate debt, you will obviously need less money than if you are acquiring a business loan, purchasing a vehicle, or buying a home.

Simply understanding the amount of the loan needed is not enough, though. What you must show precisely is how much money you can afford to pay back. If you miscalculate this amount, you could have your credit score ruined. Even worse, if you put up collateral for your loan, you will lose that property as well.

## Consider Alternatives Before Signing Your Name

There are alternatives to commercial personal loans that are worth considering before taking on this kind of debt. If possible, borrow money from a friend or relative who is willing to issue a short-term loan at zero or low interest. Alternatively, if you have high-interest credit card debt that you want to eliminate you may be able to perform a.

What’s a balance transfer, you ask? Some on new purchases and on your old, transferred balance for a year. If you can get one of these deals and manage to pay off your balance while you have the introductory interest rate you may be better off opting for a balance transfer than for a personal loan. It’s important to pay off your balance before your APR jumps from the introductory rate to a new, higher rate.

Loan calculators can help you figure out whether a personal loan is the best fit for your needs. For example, a calculator can help you figure out whether you’re better off with a lower-interest rate over a lengthy term or a higher interest rate over a shorter term. You should be able to see your monthly payments with different loan interest rates, amounts and terms. Then, you can decide on a monthly payment size that fits into your budget.

**Recommended Reading: Citizens Bank Saving Interest Rates **

## Effective Interest Rate On Installment Loans

Many consumers have installment loans, which are loans that are repaid with a set number of payments. Most car loans are installment loans, for example.

Unfortunately, one of the most confusing interest rates that you will hear quoted on a bank loan is that on an installment loan. Installment loan interest rates are generally the highest interest rates you will encounter. Using the example from above:

Effective rate on installment loan = 2 X Annual # of payments X Interest/ X Principal

**Effective rate/installment loan = / = 11.08%**

The interest rate on this installment loan is 11.08%, as compared to 7.5% on the loan with compensating balances.

## How To Earn More Interest From Your Savings Account

Now that youre equipped with the mathematical tools you need to calculate interest rates, its time to consider what to do next. Perhaps youre looking for a high-yield savings account that can compound your interest fast.

Well, youre in luck. There are many competitors in the banking market with relatively high interest rates. Small Business Bank and Lili, for example, offer interest rates as high as 1%.

While a savings account will never be the most lucrative investment option, its a safe place to store your money. Savings accounts ensure your cash is available when you need it and that youre earning a little interest in the meantime.

Want affordable banking with great perks? With BlueVine, you can get a fee-free business checking accountand you can even earn interest on account balances over $1,000.

**Recommended Reading: Fidelity Money Market Interest Rate **