The interest rate is an important part of a loan, it also determines the costs that you pay for a loan. The lower the interest rate falls, the lower the costs you pay for a loan. Keep in mind that it is of course also wise to use a reliable lender, with good conditions. What happens, for example, in the event of your death and what about the fixed interest rate? Do not just go for the most competitive offer, make an online comparison and pay attention to some of the following factors that we have listed for you.
In any case, take a good look at the interest rate per year and view our example calculation to get an idea of the influence of the interest rate on the total costs that you have to take into account. You can also choose between a fixed or a variable interest rate. Do you want as much security as possible, or do you dare to take some risk on the other side and therefore perhaps pay less for the credit? Finally, the actual costs per year will be slightly higher than the mentioned interest rate, something that we will discuss at the end of this article.
Interest rate per year
Keep in mind that the interest rate always represents an expense percentage per year. You probably pay the interest per month, which means that the actual costs will be even higher. However, you can use the interest rate per year for borrowing money to compare the costs of different loans. An interest rate can be both fixed and variable and it has a significant impact on the final costs you pay.
It is wise to look for the lowest possible interest rate, provided it is a reliable loan with good conditions. In addition, pay close attention to the term of the credit. For example, a low interest rate combined with a very long term can still cause the costs of a loan to run high. In that case it is even possible that the loan is more expensive than a loan with a shorter term and a higher interest rate per year. Compare the costs and repayment options within a short period of time to choose the ideal interest rate and loan term.
Influence of the interest rate
The interest rate has a significant influence on the costs you pay, so it is wise to look closely at this. For example, suppose you take out a loan of $ 10,000 and pay an interest of 7% per year. Without repayments, this would lead to an interest rate of $ 700 in a year, just under $ 60 per month. However, would you find a loan with an interest of 6% per year? Then this means that you only pay $ 600 interest per year, making the monthly costs suddenly $ 50. This can lead to significant cost savings, in this case of almost 17% on interest charges.
It is therefore worth taking a good look at the interest rate and also taking minor differences of one percent or less than that seriously. A saving of $ 100 per year on the interest will simply lead to a total saving of $ 1,000 over a 10-year term, which means that a large part of the costs of the credit will suddenly disappear. Compare the interest rate of the different lenders, to be able to make a good choice.
Which interest rate do you choose?
You also have a choice of a fixed or variable interest rate, an important choice when you take out a loan. Traditionally, the personal loan has a fixed interest rate, while the revolving credit facility uses a variable interest rate, for example.
If the interest rate is fixed, this means that you agree with the bank in advance what interest rate you will pay over the entire term. Whatever the interest on the market does in the meantime, you default to pay the interest rate that you have agreed, throughout the life of the loan.
On the other hand, do you opt for a variable interest rate for borrowing money? Then you take, as it were, some risk, something that can give you a discount on the cost of the credit. A variable interest rate is often slightly lower, because you take over part of the risk from the bank. The moment the interest rate rises you pay a little more for the credit you took out, the monthly costs will go up a bit. Is interest on the other side starting to fall? Then the costs will decrease, so that the interest rate ensures that you will have more money left over every month.
Interest rate and actual costs per year
Finally, you should take into account that the interest rate is not equal to the actual costs per year. For example, suppose you pay an interest of 3.95% per year for a home loan, then chances are that the actual costs will amount to 4% per year. There are no hidden costs, this is due to the fact that you will pay the interest monthly.
If you turn it around this becomes clearer. Suppose you have a savings account with an interest rate of 1.95%. If you receive this amount annually, this is equal to the actual yield. However, if you were to receive the interest per month, you would then receive interest on interest after the first month of the year. This means that you also receive interest on the amount that you received in interest on your capital. As a result, the interest rises slightly further than the aforementioned 1.95%. The other way around, this also works with a credit, although in that case it is of course to your disadvantage. That way, the actual cost of the credit will be slightly higher than the said interest rate, so if that’s nothing to worry about, it has to do with paying the interest per month.