Why Interest Rates Matter

A friend of mine told me a shocking story recently about her son-in-law’s experience buying a car. He found the car he wanted at the price he wanted, but the dealership wanted to charge him nearly 20 percent interest on a loan – all because he had no credit. His parents took him to their bank, but the best the bank would do was 10 percent because he had no credit. In case you don’t know, neither of these rates is good for an auto loan – not by a long shot.

Why does it matter? Your rate often determines if you can afford to pay back the loan. A higher rate makes your monthly payment higher and also can make your loan term longer. In other words, your interest rate costs you money. The higher the rate, the more you pay and the longer you pay.

Let’s say you want to take out a loan to buy a computer that costs $1,000. The store offers to give you a loan at 20 percent interest. If it takes you two years to pay back the loan, that computer will cost you an extra $221 in interest over two years, with a monthly payment of about $51. Your $1,000 computer has cost you $1,221.

Now, let’s lower the interest rate. It’s the same scenario, but instead of 20 percent interest, the store wants to finance your loan for 10 percent interest. You’ll pay about $107 in interest over two years, with a monthly payment of about $46. Up your payment to the $51 above, and you’ll pay off your loan in less than two years. Your $1,000 computer now only costs about $1,100.

Do you see how that works? When your interest rate is double what it should be, you end up spending more than double in interest because of the amount of time it takes to pay off the loan. That is why interest rates matter.

Many lenders will charge higher rates to people with no credit history, because there’s no way to predict if they will repay the loan responsibly. A point or two increase is understandable, but don’t let anyone charge you twice the rate just because you have no credit.

The best thing to do is check with your credit union first. You already know you can trust us.