Interest is the cost of borrowing money. It begins to accrue, or add up when loan disbursements are made or credit is issued. Be it interest earned on a personal savings or checking account or interest accruing on federal student loans, private student loans, personal loans, or credit cards, it's important for students to understand interest, how it affects them, and how to stay on top of it. The following are some tips you can offer students on how to use credit in the most advantageous way.
Understanding the definitions of common interest-related terms is important. The most commonly used terms are principal, interest rate, and capitalization.
The amount of interest that will be paid depends on:
There are ways to reduce the amount of interest to be repaid.
The amount of interest that accrues (accumulates) on loans from month to month is determined by a simple daily interest formula. This formula consists of multiplying the loan balance by the number of days since the last payment, times the interest rate factor.
Visit the Financial Student Aid (FSA) website to learn more about how interest is calculated.
It's important to keep finances healthy for many reasons. Bad credit can have a negative effect on interest rates charged on loans and/or credit cards. For example, if a lender checks a potential borrower's credit report and finds the borrower has a record of missing payments, that lender may decide to deny credit for the customer or charge a higher interest rate for the loan than they would for a customer who has a clean credit report. A credit history in good shape can save money by allowing borrowing at lower interest rates.
The best ways to keep interest charges from getting out of control are to: