Interest Question(s)?

Question

Im thinking of buying a HP computer. The computer costs about 868 dollars. Im going to pay it off by monthly payments. But the thing is that you have to like get another credit line (or somthing, i really dont know im very ignorant when it comes to economics and such). On the application site (for the credit), in the fine print it says "For Accounts generated on or after 3/27/01: Variable Standard Rate APR: 20.4% as of 04/30/08. Variable Default Rate APR: 23.4% as of 04/30/08. For Accounts generated before 3/27/01: The Standard Rate is 19.2% APR. Offer valid 05/04/08-10/31/08.". I have no idea what this means. Can someone please give me the interest rate? Or atleast explain this? And does the interest go down as you pay it? For example, if you have an interest of 14 percent and you buy somthing that costs 1000 dollars, do you keep paying the interest of 1000 or the amount that is left to pay?

Thanks,

Pedro

Answer 1

If you end up getting this loan to pay for the computer, you will be paying the variable stand rate APR of 20.4%. If for whatever reason, you default under the loan agreement (examples could be if minimum payments are not paid on a timely fashion), your loan interest will go up to the variable default rate of 23.4% APR. These rates will apply since the these are the rate that apply to loan generated after 3/27/2001.

The interest rate on the loan could either go up or down (i.e. variable). Likely the rate is set at a margin over the prime rate.

What does go down is the balance if you pay more than the interest due for the billing cycle (probably monthly). To use your example, if you end up carrying a loan with a balance of $1,000, @ 14% simple annual rate, your interest due on each monthly billing cycle would be $1,000 * 0.14 / 12 = $11.67.

Any monthly payment you make that is over the $11.67 amount will be use to pay down the original balance due. On the other hand, if you just pay the $11.67, you will no making any progress towards paying down the total amount due and your loan balance will stay at the same level as of last payment date.