Interest Rates

When you are considering taking out a loan or a mortgage something that you should also consider are the interest rates.  Interest rates can vary for a number of reasons and it is usually a combination of the amount of money borrowed, the amount of time set for repayment, and also how reliable or safe the borrower is.  Another way to understand what interest rates are is that they are represented as a percentage of the principal amount borrowed and are set by the lender.  They are also often called the APR or annual percentage rate.

 

Any time that an individual borrows cash, goods, assets, vehicles, buildings, and other assets an interest rate is applied to the amount borrowed and is set by the lender.  A low risk borrower will likely get a better interest rate than if the borrower that is high risk; however there are some loans or goods that will have a set interest rate that is based on the market for those items.

In Australia the cash interest rate is established by The Reserve Bank of Australia and that rate is assessed every month.  When it comes to companies and businesses that provide credit or are lenders they can set their own interest rates and can increase or decrease those rates based on what the cash rate is.  Any time that you are considering borrowing looking at all of your options can be beneficial as there are different types of interest rates to choose from and finding the right on for you needs can save you money in the long run.

With a variable interest rate the percentage of your interest rate can change with the changes in the cash rate and your lender can also change the percentage.  An advantage to this type of interest rate is that it has the potential to decrease as the cash rate decreases which will mean that you are paying less, however it can also go up for the same reason.

A fixed interest rate means that you lock in on a specific amount for your interest rate and it does not get adjusted based on the fluctuating cash rate.  You can usually lock this amount in for around 1 to 5 years.  This means that you do not have to worry about your interest rate going up with cash rates but it also means that they will not go down either.

If you are interested in taking out different loans but are worried about what your monthly payments will be using an interest rate calculator is a great way to figure that out.  With an interest rate calculator you simply entry the amount you would like to borrow, how long you want to pay it back, and what you want your interest rate to be.  You can then calculate how much you would have to pay monthly over the lifetime of your loan.