News flash: Borrowing money isn’t free. Anytime you take on debt, you will pay for doing so. How much you pay depends on the interest rate your lender charges. Many types of debt come with a fixed interest rate, such as 5% a year, that won’t change over the life of your loan. Other loans have a variable rate that can move up and down, depending on what’s happening in the economy. In some cases, such as when you take out a mortgage, you’ll also pay up-front fees on a loan.
What interest rate you pay generally depends on how worried your lender is about being paid back. If your lender thinks it’s making a safe loan to you, then you’ll pay a lower rate. Short-term loans typically come with lower rates than long-term loans. If you’ve been meticulous about meeting debt payments in the past, then you probably have a good credit score and will qualify for a better-than-average rate. Rates will also be lower if your lender can repossess a physical object, such as your house or your car, if you don’t pay back the loan.
Loans that usually have low rates include:
Loans that usually have high rates include:
Whether you have a good or bad credit score can make or break certain moments in your life. With a good score, you might be able to afford your dream house. With a bad score, you might not be able to get a mortgage at all. And it can take a long time for your credit history to recover after a taking a hit, so it pays to treat it with care. To protect your score, you should never miss a minimum payment. It also helps your score to keep your total spending below one-third of your credit limit.