Let's say that your car is getting old and you're thinking about replacing it. Do you think you'd be more likely to buy a car when interest rates are high or when interest rates are low?
Answer: If you're like most people, you’d be more likely to buy a car when interest rates are low. A lower interest rate means the cost of borrowing will generally be less. Consider a $15,000 loan at two different interest rates.
|Loan amount||APR||# of Monthly payments||Monthly payment||Total cost of loan|
In this case, your monthly payment at a 10% interest rate would be $380.44; your monthly payment at a 7% interest rate would be $21.25 less, for a savings of $1,020.00 over the life of the loan.
In this example, the number of monthly payments is the same. However, the length of a loan, along with the interest rate, will also determine the cost of borrowing.