Borrowing money is something most of us will do at some point in life—whether it’s for a car, a home, higher education, or unexpected expenses. Loans are part of adulthood. But here’s the catch: when you borrow, you almost always pay back more than you took out. That extra amount is called interest and understanding how it works can save you a lot of money and stress.
As your Financial Gurus, we’re here to break down what loan interest really means, why it matters, and share practical tips to help you make smarter borrowing decisions.
How Interest Works
Think of interest as the cost of borrowing money. If you borrow $10,000, that amount is called the principal—the original balance you owe. Interest is the extra money you pay on top of that principle for the privilege of using the lender’s funds.
Interest is usually calculated in one of two ways:
- Simple Interest – Based only on the original amount you borrowed (the principal).
- Compound Interest – Calculated on the original amount plus any interest that’s already been added to the loan, which means your total balance grows faster over time.
Here’s the good news: Wayne Westland Federal Credit Union only charges simple interest on our consumer loans. That means you’ll never pay interest, on interest—just on the original amount you borrowed. This helps keep your payments predictable and lowers your borrowing costs.
Why Interest Type Matters
Compounded interest can accumulate significantly over time, especially with credit cards that don’t have a specific term. Credit cards typically use compound interest, and if you carry a balance from month to month, you’re not just paying interest on your purchases—you’re paying interest on your interest.
This can quickly spiral out of control, making it harder to pay off your balance and easier to fall into a cycle of debt. That’s why it’s so important to understand how interest works to make smart borrowing decisions.
Actual repayment on both simple & compounded interest loans can also fluctuate based on the number of days in the calendar year, making early payments as well as late payments. A good rule of thumb is to always pay more than the amount due if possible and always pay early!
Why Interest Matters
Interest impacts both your total repayment amount and your monthly payment. A higher credit score usually qualifies you for a lower interest rate, making borrowing money more affordable. Conversely, a higher interest rate increases your monthly payment and can strain your budget.
Always review the quoted interest rate carefully before signing the dotted line—it’s one of the biggest factors in determining whether a loan is truly worth taking.
Tips to Manage Interest
Shop Around
Compare interest rates, potential fees, and loan terms before committing. Longer terms often mean lower monthly payments, but they increase the total interest paid over the course of the loan. Shorter terms have higher monthly payments but reduce overall interest costs. Always match your loan terms to your budget and financial goals.
Improve or Maintain Your Credit
Your credit score plays a big role in the interest rate you’ll receive. Pay bills on time, keep balances low, monitor your credit report, and dispute any errors. These steps can help you qualify for better rates and save money.
Make Extra Payments to Principal
Got a little extra cash? Apply it toward your loan’s principal balance. Even small principal-only payments can reduce the total interest you pay and help you pay off your loan faster. Just check for prepayment penalties first.
At Wayne Westland Federal Credit Union, we never charge fees for early payoffs!
It’s one more way for us to support your financial wellness and help you stay in control of your debt.
Refinancing As an Option — Interest rates can fluctuate month to month and year to year. If rates drop or your credit improves and qualifies you for a lower rate, refinancing your loan could save you money.
Interest is the true price you pay for borrowing money—it shapes the total cost of your loan and how quickly you can pay it off. Understanding the type of interest you’re being charged, comparing offers, and implementing strategies to minimize interest aren’t just smart moves—they’re essential steps toward long-term savings. A little effort now can lead to big financial benefits later.
Ready to take control of your borrowing? Contact Wayne Westland Federal Credit Union today—we’re here to help you make the smartest financial decisions possible.
Sincerely,
Your Financial Gurus
