Interest rates explained in under 5 minutes

Walk through a shopping centre, watch your favourite week night program or sit on the web for any length of time and you’ll notice rate advertising – whether it be for a home, car or other personal loan. But what do the rates you see advertised actually mean?

Deciding which loan product is right for you can be daunting, so to help give you a better understanding, we’ve put together a quick outline on what the different rates mean.

1. Variable rate

A variable rate loan means the interest you pay can go up and down in response to a) changes in the Reserve Bank of Australia (RBA) cash rate and b) changes made by your credit provider. The benefits and disadvantages are pretty simple – if the cash rate goes up, you’ll probably pay a higher rate, but if it goes down, your repayments will probably decrease. It’s important to note that banks only get a small portion of their funds from the RBA, so increases and decreases in the cash rate don’t always mean an increase or decrease in the rate you pay.

2. Fixed rate

A fixed rate product allows you to lock an interest rate in for a period of time – typically 1-5 years. A fixed rate will safe guard you against changes in the cash rate – which will also mean it will be easier for you to budget as you will know exactly what repayments will be for that locked in period. A disadvantage could be that you will not benefit from any decrease in the cash rate or future rate changes made by your credit provider.

3. Partially fixed rate – or a split loan

A split loan means you have part of the loan as a fixed rate and another part as a variable rate. By doing this, you are able to enjoy the benefits associated with both variable and fixed loans for the sum of money you chose.

4. Introductory rate

Introductory rates are offered by some credit providers. Usually it means they will offer you a discounted rate for an initial period of time during the loan – often the first one or two years. There can be restrictions associated with these loans and people can get caught out with early termination fees.

5. Comparison rate

A comparison rate includes the interest rate or weekly repayment amount, plus most fees and charges. When comparing interest rates between credit providers it is important to look at the comparison rate as it will give a more accurate indication of your repayments.
 
No matter what kind of loan you are after, it pays to do your research and talk to somebody who knows the products inside and out. That way you won’t be left with any surprises in the future. For more information phone our Queensland based Contact Centre on 13 14 22 or drop into your local Heritage branch.

* Based on a $150,000 loan over 25 years. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

The information provided is intended as general information only. Blogs have been prepared without taking into account your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness having regard to your objectives, financial situation or needs. You should consider obtaining personal investment, taxation and/or legal advice before making any decision.  Please consider the Guide to Heritage Deposit Products and Guide to Heritage Credit Card Products (available in-branch, or at www.heritage.com.au) before you decide whether a product is right for you. All loans and credit cards are subject to application and approval. Conditions, criteria and fees apply and are subject to change without notice.