## Q&A About Effective Interest Rate

#### What factors affect the calculation of an Effective Interest Rate?

Fees and charges can affect how effectively a borrower pays back their loan. These factors include points (which are also known as origination fees), application fees and prepayment penalties among others. These can all increase or decrease your overall cost of borrowing money which affects how quickly you pay off your debt as well as what type of financing option works best for you. When comparing loans it's important to consider these costs so that you know exactly what kind of deal you're getting into before signing on the dotted line."

#### What is Effective Interest Rate?

The effective interest rate is the actual amount of interest that you pay on a loan. It takes into account any fees or charges that are applied to the loan.

#### How does one calculate the effective interest rate?

To calculate the effective interest rate, you need to first determine how much money was borrowed and then subtract any fees or charges from this amount. The resulting figure is your effective interest rate. For example, if you borrow \$100,000 at 5% over 30 years and there are no fees or charges associated with this loan, then your effective interest rate will be 5%. If there were a \$1,000 origination fee charged when taking out this loan, then your effective interest rate would be 4%. This is because \$1,000 would be subtracted from the original amount borrowed (\$100,000) so that only \$99,000 remains. This means that in order to pay back \$100,000 over 30 years at an annual percentage rate of 5%, you will have paid 4% in total (5% divided by .96).