What Is a “Good” Interest Rate?

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In a world full of information that’s available in the blink of an eye, it can be very overwhelming to understand what is considered good interest rates for various loans. Personal, student, auto, home, and even savings accounts have different criteria. In order to better explain what an interest rate is, it’s beneficial to first understand how it is created. An interest rate is determined by three main factors. The Federal Reserve is America’s central bank and is the most powerful force in the U.S. economy. This system, created by Congress, influences the supply of money as well as credit, which affects variable interest rates. Investor demand for U.S. Treasury notes and bonds are the second factor, which has an impact on long-term fixed interest rates. The final factor is the banking industry, which can alter interest rates based on business need. Taking that into consideration, an interest rate can be defined as the percentage of the principal or original amount by a lender to a borrower for the use of money. In simpler terms, the lower the interest rate, the less you’ll end up paying back. 

Below we’ll take a deeper dive into what qualifies as a good interest rate for each loan type. 

Personal Loans

These loans are typically unsecured and have no restrictions for their usage. The annual percentage rate or APR for this type of loan can range from 5% to a whopping 36%. It is important to maintain a high credit score to ensure you will lock in a competitive interest rate. A reasonable interest rate range for personal loans can be anywhere between 10% – 12%, with the potential of securing something lower depending on the lender and your credit score. Be careful with shopping around, as too many hard inquiries can have a negative impact on your score.

Student Loans

One of the most common types of loans is student loans, which assist individuals with covering the expensive cost of tuition and other school-related expenses. According to the Department of Education and Free Application for Federal Student Aid (FAFSA), the interest rate for the 2019 -2020 school year for undergraduate students is currently 4.53% and 6.08% for graduate students. Private loan rates have the potential to be lower and are dependent upon your credit score. If your college days are behind you, you do have the opportunity to refinance. Currently, the fixed-rate ranges from 3.29% – 8.07%, while the variable ranges from 2.43% – 7.79%.

Auto Loans

Typically, the higher the credit score – the better the interest rate you can secure for financing the car of your choice. However, just like the price of your vehicle you can negotiate the interest rate. Car loan interest rates change quite often, so it’s best to take your time and do some research before signing the dotted line. A general question that’s often asked is, “why do newer vehicles have lower interest rates?” On many occurrences, lenders see newer vehicles as low-risk compared to older models that have the potential to need repairs, making it difficult to assess the resale value. Various auto dealers will advertise a 0% interest rate which is indeed possible. View the terms and conditions for various dealers as this offering is typically for new or certified pre-owned cars. There are many online resources to help calculate potential interest rates based on credit score ranges. On a 60-month term, the average interest rate in the U.S. is currently 4.21%. Another option for those that qualify is utilizing a credit union, which often offers cheaper rates for their members.

Home Loans

Interest calculations for homes are a bit more complex than other loan types. For a fixed-rate mortgage, the interest rate will remain the same during the life of the loan. Variable interest rates, also known as adjustable-rate mortgages (ARM) can increase or decrease based on market trends. Before applying for a mortgage, getting preapproved will help tailor your home search by providing estimated numbers for a mortgage amount and potential interest rates. During the closing process, you have the option to purchase discount points that can reduce your interest rate. The lender determines how much your interest rate is reduced based on how many points are purchased by the borrower. For example, for every single point purchased, your interest rate could be reduced by 0.25%. Before using this service, be sure you understand what additional costs you’re required to pay upfront at the time of closing as well as proposed savings each month on the mortgage.

Savings Accounts

Unlike the other loan types mentioned, the higher the interest rate or annual percentage yield (APY) for a savings account – the better your return. Many online banks offer at least a 2% interest rate compared to the average 0.06%, according to CNN. Dedicate some time to research online banks and minimum account balance requirements before making a final decision. This should not be used as a method to invest due to its’ small return, however opening a high yield savings account is something rewarding and requires little to no effort.

All in all, there are two main avenues to ensure you’re landing the best interest rates – research and maintaining a healthy credit score. While there’s excitement or eagerness tied to making a home or car purchase, the very last thing you want to do is make a hasty decision that could have a negative impact while being very costly in the long run. Conduct as much online research as you need to gain a level of comfort before making any final decisions. It’s also helpful to solicit the advice of professionals to better assess your own personal situation. If your credit is not ideal to receive the best interest rates available, hold off on making these large purchases, if possible. Maintaining a positive payment history and low credit utilization are the key ways to increase your credit score. 

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