Loan rates, what are they?
Every day in the news you hear something new about interest rates, loan rates, the Reserve Bank, borrowings and what it all means for the average Joe.
But what are loan rates and what do they have to do with you?
Loan rates are the interest rates applied to your loan which are added to the principal cost of the loan for the duration of the time you spend paying it off.
Does that make sense?
Let's look at loan rates in more detail.
When you take out a loan, you decide on a value which you need to borrow to service your particular need for the money.
If you are buying a house, you might need to take out a mortgage of $300,000.
If you are buying a car, you might need to find a personal loan for $10,000.
If you need to pay off your credit card debt, and fast, you might need a quick cash advance of $200.
Either way, loan rates apply on top of the amount you are taking out as your loan.
So are all loan rates the same?
No.
Loan rates differ depending on the type of loan you have taken out, and the financial institution in which you have taken out the loan.
For example, if you take out a small loan, loan rates on this loan will usually be much higher than if you take out a much larger loan, and commit to paying it off over a much longer period.
Because smaller loans are paid faster, the loan rates are normally higher, so that the financial institution or lender can recoup costs in the best way possible.
Is there any way to avoid loan rates?
No.
If you are having money loaned to you, loan rates are part and parcel of the transaction.
Money does not grow on trees for you, and nor does it grow on trees for your financial institution or lender - applying loan rates to their loans is the only way that banks and lenders can keep loaning money to all of their customers.
What do loan rates range from?
For some larger loans, like mortgages, loan rates can be as low are 4-5% per annum.
This increases the loan and the life of the loan reduces.
So a personal loan for $5000 may have loan rates between 15-20%, but the life of the loan would generally be a lot shorter, so the customer would be paying the higher loan rates for a much shorter period of time.
Loan rates change all the time with the peaks and troughs of our economy.
Sometimes you are able to lock in your loan rates for certain types of loans; to ensure you know what you are paying will not change for a certain period of time.
At other times you can use variable loan rates to determine how much interest you pay on your loan.
