QandAs: Loans

What is an Interest Rate?

Answer:
An interest rate is the percentage of your loan

balance that you pay as interest each year. If you borrow $100,000 at 7% interest, you would pay roughly $7,000 of interest during the first year. Interest is charged on your outstanding balance, not on the original loan amount.

As your balance declines, the amount of interest you pay declines as well. For this reason, most of your payment goes toward interest at the beginning of a loan and toward principal near the end.

Some loans have adjustable interest rates, which means the amount of interest you pay can change over time. A change in the interest rate will in turn affect the amount of your payment.


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