We explained how a loan works and how your payments are applied, but we didn’t really dive deeply into how interest works, which is crucial to understanding how your loan works.
Let’s review: interest is the lender’s charge for lending money. To a lender, a loan is an investment, and the interest is the return on the investment. To you, the borrower, it’s part of the total cost of the loan.
Interest accrues, or accumulates, and also compounds to your principal, daily, monthly, or annually. Many loans accrue interest daily and compound monthly, which means every day, you’re being charged for interest at your daily rate. The daily rate is your annual interest rate divided by either 360 or 365, depending on your loan documents, such as your promissory note and credit card agreement. You then pay off that accumulated interest at the end of the month.
Lenders use Annual Percentage Rate (APR) when quoting loans to borrowers. APR is a broader measure of the cost to you of borrowing money, which includes the interest rate, points, fees, and other changes your have to pay to get the loan.
View your interest rate by logging into your account or viewing your loan document.