Step 4. Sign Credit Agreement
One of the most important pieces of your loan is the interest rate. As I mentioned before, the lower your credit score, the higher the interest will be. Ultimately, that means you borrow more money.
Lenders use your credit to determine the annual percentage rate (APR). Interest rates can vary anywhere from 5 percent to 36 percent. Those with the best credit get loans with an interest rate of 5 percent. Those will poor credit end up with 36 percent interest.
The best way to illustrate this is with an example using numbers. If you plan to borrow $10,000 and have 5 percent interest, that means your total interest is $500. You borrow $10,500 from the lender. If the term of your loan is 36 months, that means you will pay $291.67 per month.
Now, let me show you how that changes at 30 percent interest. You borrow $10,000 at 30 percent interest, which makes your total interest $3,000. The total amount you have borrowed from the lender is $13,000. Your monthly payment becomes $361.11.
With a higher percentage rate, you end up borrowing $2,500 more and pay about $70 per month. I have shown you two extremes here to really emphasize my point. You should shop around for the best rate for you by spending the time to look for the right lender for you. This helps you save money in the long run.