Debt can be expensive โย not only are borrowers responsible for paying back the principal balance they owe, but also any interest charges that have accumulated on top of it.
When it comes to loans, lenders tend to bake interest into the loan up-front, so youโll usually know exactly how much youโll pay over the entire repayment term. Credit cards, on the other hand, apply finance charges to any portion of your balance remaining after the grace period ends.
All in all, interest can end up being quite costly over the life of a loan or on a revolving credit account. The amount of interest you can expect to pay ultimately varies by debt type.
So, letโs take a closer look at the average interest rate for some common types of debt, like credit cards, loans, and more.
Credit Cards
Credit cards are notorious for carrying high interest, which is why itโs advisable to pay off as much of your balance each month as possible.
According to WalletHub, credit cards carry these average interest rates:
18.61 percent on new offers
15.09 percent on the existing account
17.46 percent on secured cards
16.69 percent for cardholders with stellar credit
Personal Loans
Personal loans are heavily dependent on credit score, but borrowers can expect them to range from approximately 10 percent to 28 percent. Borrowers use personal loans for a variety of reasons โ like buying big-ticket items, funding home renovation projects, and paying for unanticipated expenses.
Many borrowers use personal loans to pay off their other, higher-interest debts in whatโs known as debt consolidation. Be aware debt consolidation for bad credit โย while absolutely possible โย tends to cost more, as lenders charge borrowers with poor credit higher interest charges to offset the risk.
Auto Loans
Auto loans typically range from three to 10 percent โ though, of course, the exact percentage will depend on the borrowerโs credit score, the length of the loan, the vehicle in question, and more.
Borrowers with excellent credit scores of 720 or above can expect to unlock the rates at the lower end of this spectrum, while borrowers with bad credit can easily face rates north of 10 to 15 percent.
If you know youโre looking to finance a vehicle within the next year or so, start doing what you can to optimize your credit score now, so you can secure the best rate possible by the time youโre ready to set foot in the showroom.
Federal Student Loans
Thinking about pursuing higher education? Unless youโre paying out of pocket, youโll want to check the federal student loan rates available to you. As of mid-2020, the rate on direct loans for undergraduates was 2.75 percent. Graduate students face slightly higher rates, just north of 4 percent for the same time period.
Of course, there are private lenders out there offering a variety of loans with varying interest rates, generally higher than federal packages.
Payday Loans
Borrowers desperate for money may consider taking out a payday loan against their next paycheck because of the ease of qualification. The problem here is that itโs not unusual to see annual percentage rates on payday loans of nearly 400 percent โ making it hands down one of the most expensive ways to borrow money. Avoid this strategy unless you truly have no other options, as itโs easy to get caught in a costly cycle of borrowing money at an extremely high-interest rate.
Knowing the average interest rate by type of debt can help you make wise borrowing decisions, but the biggest thing you can do to help yourself across the board is to raise your credit score.
