Hattie Brown/ March 28, 2019/ Signature Loans

The interest rate is a financial indicator that is very important to control. Expressed as a percentage, it calculates the price you have to pay to borrow money.

## The interest rate of a payday loan: how does it work?

When you make a payday loan, you have to pay interest, in the form of income, to the person who loaned you money. The interest rate then corresponds to an annual percentage of this income calculated on the sum lent.

For the borrower, it’s the price you have to pay to borrow money. For the lending organization, this corresponds to the remuneration due for the service rendered and the risk incurred.

Defined by the bank, the credit institution or the lender who is advancing you money, you must take into account this monetary percentage in the development of your repayment budget.

## Calculate the interest rate of a payday loan

To best manage your personal finances, calculating the interest rate is extremely important. For this you need to know if the interest rate of your next payday loan is a fixed or variable rate.

### Fixed interest rates

A fixed rate loan means that the interest due is blocked and will not change during the entire repayment period. The advantages of this type of rate are that you know the methods of calculation, it is quite simple to achieve and you can prepare your budget. However, this rate is often higher than the variable rate and you can not benefit from the lower rates.

If you borrow an amount of \$ 10,000 with monthly payments of \$ 234.56 and a fixed interest rate of 3.7%, the formula for calculating the interest payable in the first month is: \$ 10,000 x (3, 7% / 12 months) = \$ 30.83.

The month following the formula will be: (\$ 10,000 – (234.56 – 30.83)) x (3.7% / 12) = \$ 30.20 and so on.

### Variable interest rates

A variable interest rate is a loan whose interest may vary until the end of the repayment. Generally, the rate varies according to the evolution of market interest rates, ie the preferential rates of banks.

If this solution seems to be a good idea to pay less interest, you should know that once rates start to rise, it gets complicated. For example, many people bought houses with a rate that was close to what they could afford and once the rates went up, it was a disaster.

The calculation remains the same as for fixed interest rates, except that each month the percentage may be different. That’s why we advise you to opt for a variable rate when the repayment term of your loan is not too long. Thus, chances are that you will not experience a drastic rise in rates and find yourself in an uncomfortable situation.

Conclusion

As you understand, the interest rate is a price set by the lending institution and for which you will have to pay to obtain a payday loan for bad credit. The interest rate depends on the agreement you signed with your lender, the period you borrow and preferential rates.