Interest rate loan (Understanding Student Loan Interest)
Anytime you see a loan advertisement for any purpose, there is the customary mention of the interest rate for the loan. Often, a low rate is the focus of the advertisement and it assumes you know the benefit of having a low rate.
There is never an explanation of what the interest rate is or how it affects your choosing their loan over any other. This leaves many consumers to wonder exactly what a loan interest rate is and how a few tenths of a percentage point will affect their loan repayment.
The Basics of Student Loans
The interest rate on a loan is basically the fee you pay for the benefit of borrowing the money you need. The lender is paid this fee for having given you the money and the lender continues to charge this fee until you have paid off the amount of the loan you owe in total. The fee is in the form of a percentage of the loan which means the longer you take to repay the loan, the more money the lender stands to make off of your borrowing it. This is how a lender makes a profit from a loan.
Paying the Loan Rate
Understanding how you repay a loan involves quite a bit more thought than you might think. There are a few levels that each payment handles each time you send in an installment. The priority for the lender, of course, is the interest. Their money comes right off the top whether you paid the basic installment rate, less or more. If you have paid the interest amount for that installment in full, the next level your money reaches is where fees lie.
These can be late fees or charges incorporated into the loan. If you have covered the fees at this point, your payment reaches the actual principle balance of the loan (the amount you borrowed in the first place). Whatever money is leftover from the payment you made goes to the principle and it is now that you are actually paying off the loan.
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