In simple terms, interest rates refer to the cost of borrowing money. When a bank lends you money, they charge you a percentage of that loan, which is payable monthly.
Interest is the monthly charge the bank or financial institution charges you for providing you with a lump sum of money upfront. They also charge other fees such as an initiation fee and monthly service fees. But, apart from the capital (the amount of money they lent you) the interest will be the biggest cost of the loan.
The bank applies the interest rate to the total unpaid portion of your loan or credit card balance. It’s critical to know what your interest rate is. It’s the only way to know how much it adds to your outstanding debt. You must pay at least the interest each month. If not, your outstanding debt will increase even though you’re making payments.
Let’s say you’ve a home loan. Interest is calculated daily on the outstanding balance of the home loan. Increases in the home loan rate, which is the interest rate paid on a bond, have a direct effect on the monthly home loan repayments.
If possible begin by paying more than the required bond repayment each month. Not only will this settle the balance owed on the bond faster and reduce the length of the loan term. But the total amount of interest paid over the loan term will reduce too.
The interest rate can either be fixed or variable. Most personal loans are at a fixed interest rate. This means that the rate is agreed upon upfront and will not change for the duration of the loan period.
If the loan has a variable interest rate, your interest and monthly repayments will go up or down as the prime rate changes. If, for example, you get a loan at a variable rate of 15% and the prime rate increases by 1%, your interest rate will go up to 16% and your monthly repayments will increase. If the prime rate drops, then your rate and repayment will decrease accordingly.