• Shop around for the best rates and terms

  • Make sure your loan rate is "simple interest," not "compound interest."

  • Don't borrow more money than you can re-pay comfortably. 

  • To avoid late fees, set up monthly minimum payments to be paid automatically from your bank account. 

  • Remember, everytime you make a loan payment on time, you are building your credit.

  • The better your credit, the less you will pay for your next loan.

All You Need to Know
About Loan Rates

Banks will quote you the effective rate of interest. The effective rate of interest is also known as the annual percentage rate (APR). The APR or effective rate of interest is different than the stated rate of interest. 

If you borrow $1000 from a bank for one year and have to pay $60 in interest for that year, your stated interest rate is 6%

Here is the calculation: 

Effective Rate on a Simple Interest Loan = Interest/Principal = $60/$1000 = 6%

Your annual percentage rate or APR is the same as the stated rate in this example because there is no compound interest to consider. This is a simple interest loan.

If you borrow $1000 from a bank for 120 days and the interest rate is 6%, what is the effective interest rate?

The effective rate on a Loan with a Term of Less Than one Year = $60/$1000 X 360/120 = 18%.

The effective rate of interest is 18% since you only have use of the funds for 120 days instead of 360 days.

Effective Interest Rate on Installment Loans

One of the most confusing interest rates that you will hear quoted on a bank loan is that on an installment loan.

Effective rate on installment loan = 2 X Annual # of payments X Interest/(Total no. of payments + 1) X Principal

Effective rate/installment loan = 2 X 12 X $60/13 X $1,000 = 11.08%

Quick Tips
"Neither a Borrower nor a 
Lender be."


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