If you’re considering a personal loan, you’ve almost certainly encountered the term “interest rates.” In simple terms, interest is the cost of borrowing money. It’s a percentage of the loan amount (the principal) that you pay to the lender. Failing to understand how interest works can keep you in debt longer than necessary, which is why it’s essential to grasp the details of interest rates, how they’re calculated, and how they apply to your loan balance. A clear understanding is the first step toward making a smart financial decision with a personal loan.
Fixed vs. Variable: The Two Types of Interest Rates
Before you can understand how interest is charged, you need to know which type of rate your loan has. Lenders typically offer two kinds. A fixed interest rate remains the same for the entire life of the loan. This means your monthly payment is predictable and won’t change, making it easier to budget. This stability is a key advantage for many borrowers who prefer a straightforward repayment plan.
