How to Compare Interest Rates
Understanding how much interest you are paying on your loans or earning in your deposit accounts is an important first step in taking charge of your personal finance. Interest rates may vary based on your credit score (for loans), on the length of the loan or investment, the entity issuing the loan or investment, and even the local or national market where you are shopping for your loan or investment. Being an informed consumer will help you to earn the maximum amount of interest possible on your deposits or investments and minimize the amount of interest you pay on your loans.
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Instructions
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How to Compare Interest Rates
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Understand what interest is. Interest is the price of a loan, the amount of money paid to borrow money. You will pay interest when you receive a loan from a lender, and you will receive interest when you deposit funds in a savings account or certificate of deposit.
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Understand how interest rates work. Interest rates are usually expressed as an annualized percentage. The two most common expressions of interest rates are annual percentage rate (APR) and annual percentage yield (APY). The difference between APR and APY is that APY includes the effect of compounding interest, whereas APR does not. Interest may be compounded as frequently as every day. For marketing purposes, consumer loans are often advertised in terms of APR, while deposit accounts are advertised in terms of APY.
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Compare APR and APY. If the APY is not given, you can calculate it online at sites such www.experiglot.com (see Resources below for the exact link).
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Understand the types of deposit accounts. The most common are checking, savings, money market, and certificate of deposit (CD). Because checking accounts are used for transactions and thus cost the bank more money to maintain and service, they generally pay little or no interest. Savings and money market accounts pay higher rates, but may limit the number of deposits and withdrawals per month. CDs allow a bank exclusive access to your deposited funds for a specified term in exchange for a (usually) higher interest rate; early withdrawals are subject to interest penalties.
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Understand the types of loans. The two broadest categories of loans are secured and unsecured loans. Secured loans require the borrower to pledge property as collateral for the loan to protect the lender's interests; if the borrower stops making payments, the lender may repossess or foreclose on the property pledged. Automobile loans and home mortgages are examples of secured loans. Unsecured loans, however, do not provide the lender with a lien on a piece of property; thus, interest rates typically are higher. Unsecured loans include personal loans, college loans and credit card debt.
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Shop around. You should seek to minimize the amount of interest you pay on loans and maximize the amount of interest you receive on deposit accounts. Bankrate.com is a popular website that helps you compare interest rates on loans and deposit accounts. Interest rates vary locally and nationally. An online checking or savings account may provide better interest rates than you can get locally.
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Tips & Warnings
Be wary of fees. For example, if you keep $1,000 in a checking account, you would be better off with an account that paid no interest than with one that paid 2 percent interest but charged a $5 a month maintenance fee. If you are considering a loan, make sure to take into account origination fees, points and other charges. Take note of variable rates. The rate of interest paid on deposit accounts and charged for loans may vary with market conditions. Such is the case with an Adjustable Rate Mortgage, (ARMs), credit cards and savings accounts (excluding fixed-rate CDs).
