How to Compare Loan Rates

Applying for a line of credit is a process that requires diligent research and a clear understanding of key terms. From APY to rate terms, knowing the ins and outs of borrowing will be help to determine whether or not a loan program is best for your income and goals.

Instructions

1. View each APY against those offered by other lenders. When evaluating loan rates, it is important to use the APY as a measure of the interest that will be paid on the unpaid balance of the loan. The APY is the annual percentage yield that will be paid each month or quarterly cycle that a loan is active. This amount tells the borrower exactly what he will pay, versus an introductory rate, for example, that would expire at a pre-determined date.

2. The lower the APY, the lower the interest rate will be. (i.e. The percentage of interest that will be paid on a rolling basis, as determined by the balance available on the loan). For example, a loan with a 6-percent APY would prove better than a revolving loan with an introductory 3-month APY at 0 percent and a 9-percent default APY rate. The default APY of 9 percent will begin after a short 3-month period. Thus, the second loan rate is better during that 3-month period, but soon becomes less competitive to the 6-percent APY after the introductory period expires.

3. Consider other fees. Consider all fees and terms associated with the loan. Make a relationship between these fees and the loan rate to define the general terms of the loan. For example, a loan with a penalty fee of 10 points (10 percent APY increase) for a missed payment would dramatically impact the value of the APY, as it is contingent upon a strict repayment schedule. If the APY was originally set at 2 percent, for example, one missed payment would then cause the APY to jump to 12 percent. When weighing this against a loan with a rate of 7 percent, without an immediate default APY, would prove better, as the borrower would not be so narrowly restricted by fees and penalties. Depending on the payment history of the borrower, the 7 percent APY would allow her to take advantage of the reasonably quoted APY and gain greater confidence about missing a payment and not being exponentially penalized. However, the high penalty of the first loan rate makes it less competitive if the borrower misses a payment (locking in the higher interest rate).