What Is a Payment Rate?

Helen Akers
Helen Akers
Man climbing a rope
Man climbing a rope

The payment rate is the amount that borrowers are required to pay in a certain time frame. It is sometimes referred to as an installment rate since each payment represents how much of the total amount owed is to be paid back at a time. A monthly mortgage payment is a good illustration of how this works. Another way to define the payment rate is as the charge per unit of a good or service.

With fixed rate mortgages, the payment rate is often equal to the interest rate. It is important to note that the monthly payment amount on a fixed rate mortgage is usually higher than the amount of interest owed each month. This is because the principal loan balance is reduced with each monthly installment. The principal balance refers to the original amount of the loan minus interest charges.

For example, a fixed rate mortgage that has a principal balance of $200,000 US Dollars (USD) and a 3 percent interest rate will have an annual payment rate of approximately $6,000 USD. The monthly installments for that annual interest charge would be $500 USD. In order to reduce the loan's principal balance, the monthly payment rate might be $600 USD.

There are some types of mortgages where the payment rate does not always equal the interest rate. With certain types of mortgages the loan's principal balance may actually grow temporarily. In these scenarios, the payment rate is usually lower than the interest rate. For instance, a loan that has a payment rate of 2 percent and interest rate of 5 percent will cause the principal balance to increase each month. The required monthly payment does not cover all of the interest charges, which are then added to the loan's principal.

Customers with adjustable rate mortgages might see a number of different scenarios. Sometimes the repayment rate is above or below the interest rate. During other months it might be the same. One of the complaints about adjustable rate mortgages is that consumers have a difficult time understanding how and when this relationship changes.

A completely different way of looking at the rate of payment is as the charge per unit. An illustration of this would be the rate that wireless telephone companies charge for cell phone minutes. If a customer uses more minutes than his plan allows, he is usually charged a per minute rate for any excess minutes. Another example would be the amount that is charged per pound for certain types of food.

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