Annual Interest Rates
On every credit card disclosure, the term "annual interest rates" is displayed somewhere on the page. In order to keep from heart attacks occurring when the disclosure is read, the words are often in very small letters. The words also appear on auto loan paperwork, mortgage loan contracts, and any other document as well as in banks which advertise savings account interest. But if one looks closely at the details of a disclosure notice, the annual percentage rates may not be the actual cost of the loan. It's all legal and the teaser rates are not in any way lies, they just don't tell the whole story. However legal, the posted cost of borrowed money can often lead a person to the belief that it's a rate he can live with, when in reality the cost is much higher.
Let's start with the words annual interest rates. This is a term that describes the base line cost of borrowed money figured on a twelve month basis. Annual interest rates are also often called nominal interest rates and are always the numbers posted for any advertisement regarding loans for any kind of purchase. These are the comforting numbers, the ones that tell a person that this lending agreement is going to be a good deal, a chance to bring home that new car, that big screen TV or that carpet that is sorely needed. So lie back and just bask in the warmth of that seventeen percent credit card APR as it is so fondly referred to on the store counter advertisement. This is going to be Phat City.
But off in the distance a thundering herd can be felt as the horde pounds away at the road coming right at the consumer. First it was the cloud of dust but soon the earth is shaking and as soon as the consumer gets home and really reads the lending agreement contract on the plasma TV, he will be run over by the quite happy and delighted creditors who foist the dreaded effective annual interest rates on that quite naive consumer. Sadly, all he wanted to do was watch the Cowboys play on Sundays and count the field grass blades on that unbelievable picture, but instead is crying over the real cost of the purchase just made. Annual interest rates have effectively trapped another consumer in its dastardly web. While so many religious people try and jam their brand of religion down others' throats, Jesus just quietly goes about being fair and balanced about His approach to each person's life. He said, "Behold, I stand and the door and knock: if any man hear my voice and open the door, I will come in to him and will sup with him, and he with me." (Revelation 3:20)
The effective APRs are the bottom line, gasp at the numbers, and get the heart medicine out reality of any loan. Our buddy who likes the Cowboys has bought a plasma TV plus a surround sound theater system for seven thousand dollars. He opens a charge card account with the electronics store which has an annual percentage rate of twenty seven percent. But the effective annual interest rate is 30.98% because the cost of the loan is compounded daily on the balance. The amount he figured in the store to pay it off in five years and the actual amount was seven and thirty five dollars more. There went the sale price savings of the home theater system. If the guy takes the loan out to ten years, the effective rate will actually be fifteen hundred dollars more than the annual interest rates advertised on the store counter.
Fifteen hundred dollars over ten years may not be thundering herd stuff to the reader, but to our Cowboys loving fan, making eleven dollars an hour as an auto lot attendant that's almost a tenth of one year's net income and seventy dollars more a month in payments. And if our young lot attendant doesn't watch himself with the monthly payments and get them in on time, the annual interest rates will climb on all his loans that he might have. Annual percentage rates for loans on the same items or credit cards are not equal among all consumers. They are all contingent on someone's FICO scores which can change on a regular basis. With a few late payments, some added new debt, and other factors, the APR and its effective rate counterpart can change dramatically. Add this to the annoying habit of credit card companies changing due monthly payment due dates willy-nilly and there become a number of circumstances affecting all of our financial situations.
Probably the biggest thing to remember with annual interest rates is the fact that they are not what they appear. This leads to the observation that one of the things that have hurt the lower and middle classes over the past twenty five years is the practice of usury, or high interest rates on borrowed money. When loans were given out of necessity rather than out of the desire for luxury items, lenders were chastised by the church if any hint of usury was suspected. But today, there appears to be no conscience regarding the practice of charging thirty percent or more on credit card or unsecured debt. It is the attempt to stay above water with minimum payments on this unsecured high interest debt that has driven lower and middle class Americans to the reality of living paycheck to paycheck.
Average Interest RateUnderstanding the average interest rate can involve utilizing certain tools that can help consumers track the rates that are available from a variety of credit sources. These tools could include specific tracking software as well as websites that post the current averages on a number of items such as certificates of deposit, automobile loans, mortgage loans, credit cards, and home equity loans. Such weekly averages can help borrowers compare a variety of rates within a specific category. For example, consumer credit cards may carry slightly lower rates than credit cards that offer rewards to card holders. Student credit can come at a higher cost than business credit and the average interest rate will reflect this. Changes in the rates established by the Federal Reserve will generally have an impact on any rates that are charged to consumers. Interest rates are usually established, at least in part, based on the perceived risks that are associated with lending to a specific borrower or class of borrowers. Individuals who have an excellent credit rating can usually expect to get the best deals on interest payments. This is because the risks that is associated with consumers who have excellent credit are usually considered to be very low. Credit cards that carry certain rewards may come with slightly higher rates of interest, but many consumers feel that the rewards that accompany the cards more than offset these higher charges.
When a consumer sees the rate that they are paying on a credit card rise above the average interest rate, they may wonder what has caused this increase. The most likely cause will be a change in personal debt to income ratio or some kind of bad credit behavior. The best way to keep interest charges low is to maintain responsible habits as a borrower and make payments on time. Of course, rates can rise for reasons that have nothing to do with a consumer's personal borrowing habits and payment history. Some credit agreements may have hidden terms buried in the fine print that will cause rates to rise unexpectedly. Generally, a creditor is required to notify a borrower before interest charges are raised. There may be a variety of other reasons that can cause an individual to pay higher than average interest rate payments. These reasons could include late payments or exceeding a personal credit limit. Taking out too many credit cards or assuming to much debt can cause these charges to rise as well. Bouncing a check can show up in a credit report and raise rates. If the borrower has provided deceptive information and this is discovered, this can result in higher charges or even the cancellation of an account. Of course, any time that a borrower files for bankruptcy, this can make the cost of credit rise dramatically.
Credit can be a valuable asset and having a grasp on the average interest rate can protect a consumer from institutions with predatory lending practices. Possessing a solid understanding of how credit works and the dangers of taking on too much debt is important. A poor credit rating can be very detrimental to an individual's quality of life while an excellent credit rating can help a family realize many long held dreams. Consumer scores are based on the likelihood that an individual will pay off any debt that they incur. The higher the likelihood of pay back, the better borrowing terms a consumer can expect. Since a detailed history of all borrowing and pay back activity is kept on file for all potential borrowers, keeping this area of life in good shape is a vital priority. For those who are just starting out in life, no borrowing history can be almost as damaging as a poor credit history. Building credit slowly through small scale borrowing and regular payments is an effective way to remedy this dilemma. Borrowing and payment habits that are consistent and timely will build a solid history over time. The average interest rate that is charged to an individual who has taken pains to build a good history in this area will generally be on the lower end of offered rates. Making wise decisions in any purchasing activity is always a good idea. Learning to defer gratification until a time when the purchase can be more easily afforded will always pay off in the long run.
Along with an understanding of the average interest rate, a consumer's attitude toward credit and credit cards is important. Using credit cards as a substitute for cash is a recipe for disaster. A good credit score can be a very powerful tool when it comes to obtaining financing. According to the Bible, gaining strength from God is very important. But they that wait upon the Lord shall renew their strength; they shall mount up with wings as eagles; they shall run, and not be weary; and they shall walk, and not faint. (Isaiah 40:31)
The dream of home ownership can hinge on the borrowing and payment habits of a consumer. In order to obtain the average interest rate on a mortgage loan, or even a rate that is lower than average, a potential borrower should be able to demonstrate a good credit rating. Automobile loans will hinge on this rating as well. Employers may run a credit check before hiring an individual. These reasons and many other demonstrate the need for responsible economic behavior and careful use of credit.