What makes an interest rate "good" varies with the type of loan, and it changes over time. At different points in the 21st century, for instance, the average interest rate for a mortgage has been as high as 8.05 percent and as low as 3.66 percent. The basic principles for deciding when a rate is good don't change, however.
Good interest rates are defined by the overall economy, the market for particular loans and the borrower. If you have a credit score of 790 and an annual income of $50,000, for example, a good rate for you will be lower than if your score is 560 and you earn minimum wage.
Suppose you want a new credit card. If you receive offers in the mail to sign up for a new card, compare them. Each offer should give you the interest rate for the card. If the rate is 17 percent, say, a $1,000 balance would earn $170 in interest over a year.
If you're in the market for a mortgage or a personal bank loan, call multiple lenders in your area. Ask for a rate quote, and then ask if that's the lowest the lender can go. Rates fluctuate constantly, and you might not get the lowest rate unless you ask for it. A rate quote this early in the process isn't legally binding, but it can help you narrow your search.
A mortgage broker can gather estimates from multiple lenders for you.
Look at the Details
When you compare interest rates, be clear about what you're really looking at. The Discover Card website lists several details that can make one rate very different from another:
- The rate might be a low introductory rate that rises after a few months.
- The rate might be variable, rising and falling with another interest rate. Fixed rates can change, but you get advance warning from the company.
- The low rate might be for transferred balances from another card, not for regular purchases.
Likewise, an adjustable-rate mortgage will start out low, then eventually rise -- sometimes steeply. It's important to find out how often it can rise and what the maximum interest rate is.
Some interest rates are low because the lender is able to recoup money by assessing other fees. A credit card can have annual fees, late payment fees, balance-transfer fees and fees for foreign transactions. Bank loans come with fees. Mortgages are rife with fees -- closing costs, broker fees, title insurance and prepaid interest on the loan. A good interest rate is just part of the picture.
The annual percentage rate on a mortgage gives you the interest rate over the life of the loan if you include the cost of all the fees. This makes it a convenient tool for comparing offers.
It's possible that a good interest rate when you start calling around isn't as good as you can get if you negotiate. If you call and ask a credit card company to lower your rate, you may get a yes. The same is true with mortgage lenders. If a competitor has already offered you a better rate, definitely mention that.