Which Loans Have the Best Interest Rates?

Which Loans Have the Best Interest Rates?

Loans

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.

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Should I Worry About Changes in Interest Rates?

Should I Worry About Changes in Interest Rates?

Interest Rates

Interest rates do change and if you have a loan then it is often a concern that the rates may go up but there is no predictability about them. This means that the best approach is hope for the best and prepare for the worst. It is good not to be negative and worry about something that may never happen, it is no good for health. However, having a plan in place in case it does, will not only allow you to cope with the situation, but will also allow you to feel more relaxed about the future. You may feel that it is hard to prepare for an increase in interest rates, but there are things that you can do.

  • Get the cheapest loan – if you make sure that you are not overpaying for your loan then this can help to keep your loan costs down. Do not wait until rates rise to swap though. Regularly compare the loan prices and decide whether you want to swap to a different one. You may feel you want to swap to a fixed rate so you know rates cannot rise but you may be tied into a lender with this sort of loan. Do make sure that you check if there are costs associated with swapping lenders as these could be higher than the money you save in interest.
  • Overpay where you can or save – if you can overpay some of your loans, this means repaying more than required, then you will be able to pay them off early. If you can do this then any increases in interest rates will not his you so hard as you will be being charged interest on less money and you will more easily be able to afford it. However, some lenders will charge an early redemption fee to anyone that tries to repay early and this could be very high. If this is the case, then you may be better off not repaying early, you will need to do some calculations to work it out. If this is the case then it will be better to try to put money aside in a savings account whenever you can. Then if rates do go up, you will have a bit extra to fall back on, should you find that you start to struggle with the repayments.
  • Do not overspend unnecessarily – it can be wise to make sure that you do not spend unnecessarily. This means cutting back a bit on luxury purchases or more expensive items. If you are considering buying a more up to date television, for example, but are concerned about how your loan costs may rise, then wait a while and put the money you would have spent on the television in a savings account to use if you need it. Then once you have repaid the loan, you will have that money to buy the new television in the account if the rates have not gone up. Holding back on spending even on small luxuries could make a difference for the future. Knowing that you have a bit of money behind you should help you to feel more relaxed about the future.
  • Be aware of where you can cut down if you need to – it may be that you are not keen to cut down on all of your spending as you may want some treats and feel this is over the top to prepare for something that may not happen. However, you should be aware of where you can cut down where necessary. It can be wise to scrutinise your spending so that you know where you are spending money unnecessarily and you will be able to cut down in those areas if you need to. Make sure that you make a note of your discoveries and keep them safe so that you can act quickly if rates do go up. You may find that you panic and worry if rates rise and so having these notes will allow you to approach matters in a methodical way.
  • Brainstorm ideas of where to earn more money – it can also be wise to think about ways that you might be able to earn more money if necessary. This might be necessary if the rates go up so much that cutting spending does not produce enough money or if it is not possible to cut spending at all. It might be that you think you might be able to do some online work, some freelancing, take on a weekend job or whatever. Thinking about what options are there and what might suit you and your lifestyle is worthwhile. Like the above, note them down and keep them safe so that you can refer to them if you need to.
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