Credit cards and loans are not free money. The convenience of any line of credit has a price, and that price is the interest that will be reflected in your debt. Any money borrowed will always cost more with the additional interest.
Interest is really a fact of financial life. If you take out a loan or use the loan, you will have to pay for the convenience and purchasing power, with additional charges. Unfortunately, interest can be a problem when it rises too high or when debts are left for a long time without being paid in full.
The following information will help you understand what interest is and how it applies to your debts.
What is the APR?
The interest is usually calculated in the form of an APR (Annual Percentage Rate, for its acronym in English). Technically, it is a single percentage number that represents the actual annual cost of the funds during the term of the loan. This includes all commissions or additional costs associated with the transaction. The interest is applied each month until you finish paying your debt.
This means that while you are taking action to pay off your debt each month, this debt is also growing a little more each month. Under normal circumstances, payments are more than accrued interest; So every time you make a payment, you pay the additional interest in that month, plus a little bit of the original debt.
As a result, you pay a significant amount of money to the creditor or lender before your debts are paid in full. The bigger the debt and the longer it takes to pay, the more money you will have to pay in interest.
What happens when the APR is too high?
When your APR is too high, you have two problems. The first problem is that your debts will actually cost more in interest than the original purchase price of the items you bought. A purchase may end up costing 2 to 3 times more than the marked price, with the additional interest. It is a waste of your money.
The second problem is that interest eats most of your payment when the APR is too high. As a result, you never see your balances go down. In very bad circumstances, your debts grow even though the payments were made every month. It's a step forward, two steps back.
How to get ahead with a high interest?
In a word: refinancing. You have to find a way to get the lender to agree to lower the interest rate so that you can recover and get ahead with your payments. In some cases, you can negotiate directly with a lender or creditor to reduce your interest rates. For your mortgage, there may also be government programs available for modifications if you are facing foreclosure.
For credit card debt, there are several ways to consolidate your debt so you can lower the interest rates that apply to you. If you have good credit, then a balance transfer or a personal consolidation loan may be the solution you need. If you do not have good credit, then the only option left to reduce your interest rates is usually by enrolling in a debt management program.