Interest

What is interest?

Interest is the lender's profit. What happens is if you borrow money, the lender will charge interest on that. That is an additional sum that you have to repay, and it can be different amounts depending on different factors. It will be different on the length of time that you borrowed the money for and it will be different in terms of the amount of money that you borrowed. It may be different depending on how much risk the lender thinks you may incur to them in terms of your ability to repay the loan.

How does interest affect my loan?

Interest is added to your loan, normally at the start, by the lender. That, therefore, is reflected in the weekly payments that you have to make. Clearly, if you are a good risk to the lender, those weekly payments will be lower. If you're a bad risk, those rates will be higher and it'll cost more over the term of the loan.

Is interest something I can shop around for?

The one thing you must always do is shop around to get the best interest rate. Different companies will supply different interest rates and quotes, and every company must tell you upfront what that interest rate will be.

What sort of interest rate should I be looking for?

In any competitive market place, the rate reflected is often by the type of asset that sits behind the loan, and what you're using the money for, so you'll normally find that mortgages are the lowest interest rates available in the market place. After that would come the secured loans, which tend to be 2 or 3 percentage points higher than mortgages. After that are unsecured loans, personal loans, which again, would be 2 or 3 percentage points more than a unsecured loan. After that, you get to overdrafts, and companies will charge you a range of rates in that, but they generally will be slightly more expensive than an unsecured loan. The most expensive type of borrowing is usually on a credit card, although there are some companies who'll give credit cards at very competitive rates, and you'll see certainly, some credits cards offering zero percent interest rates, but you have to look at those very carefully, and there is often may be a balance transfer fee to that.

What is 'fixed' interest?

Fixed interest is where the rate of interest is fixed at the start of any loan transaction and remains the same all the way through that transaction. The lender can't change that rate without a prior agreement.

What is 'variable' interest?

Variable interest is where the rate moves up and down. This is normally linked to the base rate of the country in which you're operating. It might also be linked to what is called LIBOR, which is the London Inter-Bank Offer Rate. That is a daily rate that's fixed in the London capital markets.

What is a 'typical' interest rate?

A typical interest rate is something that is required by law under the "Consumer Credit Act" to be quoted in advertisements. This is a rate that, normally more than 66% of cases, that lender has provided in the recent past.

What is a 'set' interest rate?

A set interest rate is when a company has agreed an interest rate with you and that is a set interest rate for the loan. It is the agreed interest rate for the loan.

What is 'simple' interest?

Simple interest is where the amount of interest is agreed at the start, and that amount, say 5%, over 4 years is added at 5% of the amount of the loan for each of the years. And that is added at the outset so they would be adding 20% of the volume of the loan at the outset.

What is 'compound' interest?

Compound interest is where that rate is added either on a daily, monthly, or annualized basis to the loan. Therefore, once a rate of 5% may be quoted, you have to look at the annualized percentage rate to know what that is, because it would come out at the higher figure. Normally in the 6.1 or 6.2 percent range depending on when the interest is regularly added to the loan.