Interest is the method by which the cost of borrowing money is determined. In the case of secured loans, the interest is the profit that the lender makes on the transaction.

The interest is added to the amount borrowed, or principal, to determine the total cost of the loan. In many kinds of loans, other charges including insurance costs and administration fees will be added to the interest and principal. Once the total cost of the loan is determined, this figure will be divided by the number of payments required in order to get the cost of the loan payments.

This process is called amortization and it is how the cost of most secured loans is determined. The loan calculators provided at many lenders' websites use amortization to determine what the interest and the cost of the loan will be.

Interest and the Cost of Borrowing Money

The interest rate is usually the key factor in determining the cost of a secured loan. The higher the interest rate the more the loan will cost and vice versa. This is why it is always a good idea to get the lowest interest rate possible.

Some secured loans come with adjustable interest rates. An adjustable interest rate can be changed or adjusted by the lender at some point. In the majority of secured loans, the interest rate will be locked in for the life of the loan.

Adjustable interest rates can get a borrower a lower rate at first but it can increase later on. Quite a few people have found they could not pay off mortgages with adjustable interest rates because of increases.

Refinancing and Interest Rates

The only way to lower interest rates on most secured loans is through a process called refinancing. In refinancing, a new secured loan is issued that pays off the first secured loan. A person will go through this process in order to get a lower interest rate and lower loan payments.

A lower interest rate will not always guarantee lower payments on secured loans. In many cases, a mortgage with a slightly higher interest rate that has a longer period will have lower monthly payments. This occurs because the principal amount is amortized over a greater number of payments.

Interest and Inflation

The interest rates on most secured loans are based upon the rates that banks pay to the Federal Reserve for the money they lend. The interest rates on loans from private sources such as hard money lenders are often much higher because they come from private individuals.

The rate of inflation ultimately determines the interest rate, which is why interest is lower in periods of low inflation. This is why many people try to lock in low interest rates with long-term secured loans. Quite a few borrowers will refinance in an attempt to take advantage of lower interest rates.

Restrictions on Interest

The rate of interest that lenders can charge in most states is restricted under the law. In some states, usury laws will restrict the maximum allowable rate of interest. These laws are supposed to protect borrowers from excessive interest rates.

Currently, there are no federal restrictions on interest rates from lenders other than banks. This could change because the Federal government is about to greatly increase its regulation of financial products, including secured loans.

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