There are many different types of loans available and it can be confusing looking at them all and working out which will have the best interest rates. You might feel that you should be choosing the one with the best rates so that you can get the cheapest loan. It is worthwhile being aware of the costs of loans and why rates vary and then making sure you choose the right loan for what you need before considering the rates.
Costs of loans
Loans vary in cost but it is important to make sure that when you are comparing them you are calculating the costs properly. It can be easy to assume that the costs are just the interest rate and so by comparing those you can find out which is cheaper. However, this is not the case as unless you are looking at the AER which includes any fees, there may additional fees to pay as well as the interest rates. This could be things like set-up or administration fees and tend to be one off fees you pay when you take out the loan. It is also very important to take into account how long the loan lasts for. To calculate the total cost in monetary terms you will have to multiply the interest cost by the amount of months the loan lasts for and then add on the fees. You will also find that there are other fees that they charge in certain circumstances such as late repayment fees. This will only apply if you miss a repayment, but it is important to make sure that you are aware of how much these are so that you can compare these between lenders.
Why rates vary?
The rates of loans vary for different reasons. Some loans will include all costs within the interest rate, so then it will be higher than those that has fees and interest to pay. In order to compare them properly you can use the AER which is a calculated interest rate that incorporates the cost of fees so that you can compare them like for like. If a loan lasts for longer then these fees are spread across a longer time period and this means that you will have a lower amount to pay each month. So, a mortgage interest rate is likely to be a lot lower than a payday loan as a mortgage lasts for decades and a payday loan for weeks. However, the amount that you repay in fees in real monetary terms will be far higher. There is also a variation due to the risk that lenders are taking. If they have some collateral, such as a house or vehicle then they know that they will be able to get back what they owe by repossessing those items so they are taking less risk. On the other hand, if you have a poor credit record, they will be concerned about the risk that they are taking and will charge more in case you do not repay. All borrowers will pay more and that money can be used to cover the costs of those that do not pay.
Choosing the right loan
It is important to choose the right loan for the purpose that you are borrowing. Some loans are specifically designed for certain purposes, such as a student loan or mortgage. However, there are more general loans, but you still need to pick the right one. For example, you need to make sure that you are not borrowing more money than you need to. It can often be tempting to borrow more so that you have some extra money to play with. However, you need to be careful as you will need to pay interest on everything that you borrow and so the more you borrow the more you will pay. It may also take you longer to repay.
Loan types vary as well. Some will have specific repayment terms where you repay a certain amount a month until it is all repaid and within in this some will have more flexibility where you can overpay and underpay at times. Some, such as credit cards will only require a minimum repayment and you will be able to repay the rest at your leisure. A payday loan usually requires just one repayment. It is worth thinking about which repayment style is likely to suit you the best. You may prefer a regular payment which will help you to ensure it is all paid off or you may like something more flexible as you feel you will often have more to repay and want to repay it early.
Consider interest rates
Once you have considered what loan type is right then you will be in a position to look at interest rates, but you need to make sure that you are looking at other factors as well, which could cost you money.