Credit
January 7, 2015

4 Myths About Interest Rates We Shouldn’t Believe

Simple. Thrifty. Living.

For many people looking for a loan, interest rates are at the forefront of their minds. Unfortunately, not everyone has all the correct information necessary to make an educated decision on a loan. This is why some of the most common beliefs about interest rates should be explored and, when inaccurate, corrected.

While getting a low interest rate is an admirable goal, it is not the only aspect to consider. In fact, there are lots of other details that make up a great loan. For example, borrowers should make sure the closing costs are not outrageous and that there is not a prepayment penalty in case they want to pay down the loan early.

When it comes to mortgage loans in particular, borrowers should pay more attention to the type of loan program that’s right for them. Common examples include fixed rate, adjustable rate and interest-only mortgages. Even with a low interest rate, the wrong type of mortgage for a particular situation could prove financially disastrous.

The same goes for other types of loans such as credit cards and auto loans. In most cases, people will get either a fixed rate, which is usually preferred, or a variable rate. If it’s the latter type of loan, even a low interest rate won’t make it the ideal loan since that rate could change at some point.

In most cases, the interest rates that everyone sees in advertisements are only available to a select few borrowers. Anyone who wants those rates will typically need to have near perfect credit, and even with that qualification, they might be expected to pay upfront fees to get the lowest rate possible.

This is why it is best for borrowers to assume that they will not be getting the advertised interest rates. Interest rates that seem too good to be true usually are. Of course, this doesn’t mean individuals looking for a loan shouldn’t still try to get the best possible rate. Anyone in the market for a loan should definitely spend some time talking to different lenders and comparing the interest rate quotes they receive. If you are looking for a loan, check out peer-to-peer loan services like Lending Club for lower interest rates.

Some people in the market for a house find adjustable rate mortgages (ARMs) appealing. This is because they’re often advertised at a lower interest rate than the traditional fixed rate mortgage. This, however, doesn’t always turn out to be the case. Sometimes ARMs have higher starting rates, so it is best to look at each loan individually rather than assuming an ARM is always the best way to save money on interest.

At the same time, many people assume that when the interest rate of an ARM changes, it always increases. In some cases, though, it actually decreases. It all depends on the floor rate; this is the lowest rate the ARM features. If the floor rate happens to be the starting interest rate, then the interest rate will increase when it adjusts because it has nowhere to go but up. If the floor rate is not the starting rate, though, it’s possible the interest rate could actually decrease.

Most people look for a fixed interest rate on any type of loan because they assume that it won’t change, but the truth is that in some cases, this could happen. A fixed rate on a credit card might increase after the borrower makes one or more late payments or even if their credit score decreases dramatically.

With a fixed rate mortgage, though, it’s true that the interest rate won’t change over the life of the loan. This doesn’t mean, however, that the mortgage payment itself can’t change. The payment can increase if property taxes or insurance costs happen to rise. This is why it is important to remember that the interest rate is not all there is to a loan

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