Interest rate
Interest rate is the percentage a lender charges on the outstanding balance of a loan, not counting separate fees.
The interest rate is the price of borrowing the money itself, stated as a percent per year and applied to the balance you still owe. On most business loans the rate is set during underwriting based on your credit profile, time in business, revenue, and the lender's cost of funds. As you pay down the principal, the dollar amount of interest you owe each period shrinks because it is charged on a falling balance. A $50,000 balance at 10 percent costs about $5,000 in interest over a full year if the balance stayed flat, but on an amortizing loan the yearly interest drops as the balance falls.
The rate matters, but it never tells the whole cost story on its own. Two loans can share the same interest rate yet cost very different amounts once you add origination fees, the term length, and the payment schedule. That is why it helps to look at the interest rate alongside the APR, which folds fees back in. Keep in mind a merchant cash advance does not carry an interest rate at all. It is a purchase of future receivables, not a loan, and its cost is set by a factor rate.
Common questions
Is a lower interest rate always the cheaper deal?
Not necessarily. A loan with a lower rate but heavy fees or a longer term can cost more overall. Compare the APR and the total dollars repaid, not just the rate.
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