All interest isn’t created equally, and that’s why it’s important to evaluate the strengths and weaknesses of each type of interest before applying for a loan. The route you take could have a significant effect on your finances, and there’s no singular best fit solution for every situation.
Interest rates are typically determined by the “prime interest rate” for that particular time and place. Variable interest rates fluctuate in step with that prime rate. That can be either an advantage or an impediment depending on the whims of the market. While investors who lock in their variable interest rate before the prime rate plunges can pay significantly less, a misstep could see their interest rates rapidly climb.
What you see is what you get with a fixed interest rate loan. They’re easily calculated and easy to understand, and you don’t need to worry about the terms of your interest changing over the course of your loan. That makes them both one of the safest and one of the most prevalent options around.
Prime Rate Interest
While most loans are calculated according to the prime interest rate, they’re usually higher than the PRI. Prime rate interest is equivalent to that rate, and that makes it one of the best options around. Unfortunately, that makes it significantly rarer. PRI loans are typically reserved for preferred customers, and that means that they aren’t available to most individuals who are looking for a loan.
Discount Rate Interest
The discount interest rate is the best deal around, but it’s even more exclusive than prime rate interest. Discount rate interest is considerably lower than PRI, but you’re unlikely to be offered it unless you’re a financial institution in need of a short term loan.
Borrowers with compound interest loans should be especially judicious in paying off their debt. That’s because compound interest builds interest off of existing interest on an annual basis. These sorts of loans can quickly become unmanageable over time, so it’s important to pay as much off as you can as rapidly as possible and to not take out a loan with compound interest unless you’re certain in your ability to pay it back promptly.