Sometimes it may be necessary to borrow money when there is something you do missing. Loans may be the necessary financial aid that means you left. Get your head across the water when it comes to your personal finances. Do you really care about the interest rates that you have to pay on your loan?
In this article, we will try to help you better understand what is important to consider when finding the best consumer loan in the jungle of deals that you are bombarded with from online loan companies on a daily basis. In this article, we will look at the importance of interest rates on how good terms you can get on your loan, so join us further.
What is the APR value of a loan?
When you start looking for the cheapest and best loan for just you and your financial situation, there is something called the APR value that you have to take into consideration. APR stands for annual percentage rate, which is the total annual cost you have on your loan.
The APR value of a loan is often easily explained as a form of kilo price on the loan. In other words, the lender that offers the lowest APR value can offer you the cheapest loan.
All banks and loan companies are subject to a requirement under the Credit Agreement Act and price marking regulations to specify the APR value, along with all other information about the loan. The APR value gives the real and total picture of what you actually have to pay for your loan annually.
In practice, this means that when calculating the APR value of a loan, all costs, both establishment fees, fees and additional costs, as well as interest, must be included in the calculation. This can determine whether you should choose one particular loan instead of another, so always check the APR value of the loan you are being offered.
What are interest rates on loans?
Interest on loans is basically a cost that is stated and calculated as a percentage of a specific loan amount.
Let’s take an example; If you borrow 10,000 in the bank or through one of the many lenders online and this loan under the loan agreement has an interest rate of 20%, you have to pay 20% of 10,000 – ie 2000 – in interest.
So, if you repay the loan within one year, you have to repay a total of 12,000, since you have to pay interest in addition to the loan amount.
The example above is very simple and logical and gives a general picture of what the interest rate actually indicates. However, in practice it is a known matter that this information alone is often misleading and the current annual cost of your loan may prove to exceed this amount significantly.
A loan comes with several types of interest
It is therefore important to be aware that in the example above it is only the nominal interest rate, which is the interest rate which gives a simple indication of what you have to pay when you borrow money. What this interest rate actually becomes depends on the specific loan agreement and will thus vary from the different types of loans and providers.
If you are looking for loans online or at some bank, the lender will often provide guidance on a given interest rate. However, this is only a guide and you have to be careful to believe that this interest rate will be used in relation to your specific loan agreement. This is because some interest rates are calculated in relation to the individual borrower, so that the risk is offset against the cost of the loan.
Nominal interest rate
However, the nominal interest rate is not worth much in itself, and if you only use it as a starting point, you will not get a fair picture of which loan is the cheapest. Below you will be presented with some interest rate concepts that are also relevant when considering the interest rates on the different types of loans.
Effective interest rate
The effective interest rate is generally more reliable than the nominal interest rate, as it shows more clearly how much you really have to pay to borrow money from a bank or a lender online. It is also termed “effective” that this gives a clearer picture in the measurement when comparing loans.
Also included in the effective interest rate is the interest rate, which can otherwise be difficult to map based on comprehensive loan documents, which is why the effective interest rate is a more accurate estimate of what is to be paid in interest on a given loan.
This also avoids having to make the cumbersome calculation required before finding the interest rate, which can be difficult if you do not have much interest or understanding of finances.
Loans with floating or fixed interest rates
An important consideration to take when it comes to the interest rate on your loan is whether you should choose a loan with a fixed or floating rate. These are the two primary interest rate models found in the loan market, so it is important that you choose the model that you are most comfortable with.
Below, we have outlined the advantages and disadvantages of both of these interest rates, so you can get an idea of which option is optimal for your particular situation. With a floating rate loan, it is meant that the loan is regularly adjusted in parallel with the market rate.
In other words, this means that you have the opportunity to get a higher or lower interest rate than what was the starting point when you took out the loan.
Floating interest rates
There are several types of floating rate loans, and the difference is that some have more frequent interest rate adjustments than others. For example, there are loans where the interest rate is adjusted every year, while there are also other types of loans where the interest rate can only be adjusted every five years.
With a floating rate loan, it is possible to get a lower interest rate on the loan if the market interest rate should fall, but there is also a risk that the interest rate may rise during the same period.
Therefore, it is generally a matter of proper judgment whether you have confidence that interest rates will fall, or whether you believe interest rates will rise, so a floating rate loan may not necessarily be the most ideal solution for you. With a fixed-rate loan, you avoid worrying about changes in the market interest rate, and you can therefore generally sleep better at night.
This is because the interest rate does not change during the loan period unless you choose to convert the loan so that the interest rate is adjusted again.
Fixed interest rates – a safer interest rate model
The fixed rate model is, as the name implies, a fixed interest rate, which is usually not possible to change during the loan period. This model may be attractive, for example if the market interest rate has been low for a long time and the fixed interest rate is therefore relatively low, but this is still no guarantee that the market rate will remain low.
The advantage of a fixed interest rate is that if the market interest rate turns out to increase later, you still avoid higher interest costs.
May have the opposite effect
In addition, you must also be aware that the fixed interest rate can also have the opposite effect. For example, you can take out a loan at an average interest rate, and if the market interest rate falls sharply, you may need to reverse the loan, which can be expensive for you in terms of administrative costs.
In relation to loans with floating interest rates, it can be said that the fixed interest rate is often well above the market rate and thus the amount of interest. This is due to the fact that you do not have the same risk of sudden interest rate increases as you have for example with floating rate loans, and therefore you must compensate for a safer interest rate model.
In addition, you can also take it a bit more calm when there is international turmoil and there is talk of interest rate increases, as this does not affect you who have chosen the secure solution in the form of a fixed-rate loan, and still sleep well at night.