After finishing this short reading you’ll be able to wisely choose both the rate and the financial institution for your next loan.
Misinformation about types of interest rates is dangerously spread out there. So pay close attention to the following so none will be able to screw you over.
CALCULATE YOUR MONTHLY RATE
To be able to compare the different rates, you have to calculate the monthly rate.
There are several types of interest rates. Let’s discuss three of them:
Monthly Interest rate: This is the rate that is calculated over your entire debt amount every single month. This type is pretty clear, you already know the % of monthly interest.
APR (Annual Percentage Rate): To convert it to a monthly rate, you have to divide by 12. For example, a 12% APR converted to month is 1%:
APY (Annual Percentage Yield, also know as EAR): To convert it to a monthly rate, you have to discount it (the opposite of compounding). This formula is more complex:
Taking as an example a 12% APY, the monthly rate is the following:
As you can see, if you convert APR and APY to monthly rate you get different results. For more information visit Investopedia.
Here you have a calculator of loan payments made in Power BI. Feel free to change the input variables to suit your needs.
Note: Power BI has an annoying bug, sometimes it rounds up the input variable to a close number. However, even if the input variables are not 100% accurate to your needs, the results are pretty close to the monthly payments you are going to run into.
Note: “Insurance and Fees” input variable is not considered to be subject to interest rates. Ask your financial institution if this is your case