Lending interest rates explained

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.

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.

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.

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.

Introductory rate

Introductory rates are offered by some credit providers. Generally, introductory rates are only for a short term, such as two years. While introductory rates may appear to be a low rate, once the introductory period is up the rate generally reverts to a higher standard variable rate. With the majority of the loan at the higher rate, this could cancel out any savings made during the introductory period. It is also important to understand whether termination fees apply and what they are.

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.