The first thing to look at when deciding on a loan is whether a fixed rate of interest or a variable rate of interest applies.
Fixed interest rates will remain the same for a set period of time. This should be stipulated in the credit contract. Variable interest rates will move up or down depending on the market.
Fixed interest rate loans will give you greater control over your finances because the repayment amount will remain the same for the fixed interest period. However, generally with fixed interest rate loans you will not be allowed to make more than the agreed repayments (pay off the loan quicker), without incurring a penalty. Check with the lender on any conditions that apply.
You can also choose to split the type of interest rate that applies to a loan. This can be done in two ways:
- when a fixed interest rate applies to the loan for a period of time only and can then be changed to a variable interest rate
- where part of the amount borrowed attracts a fixed interest rate and the remainder a variable interest rate.
Some lenders will offer consolidation loans.
These loans allow you to group together your smaller loans. The advantage of a consolidation loan is that you only have to make one repayment per month. The disadvantage is that you will usually be paying the loan off for a longer period of time.
When you use credit you are using someone else’s money (the lender’s). You will need to pay the amount you borrowed back — this amount is called the principal.
You will also be charged interest by the lender for using their money. The interest rate charged will usually be expressed as a yearly rate (the annual percentage rate), for example 14% p.a.
The total amount that you will need to pay back to the lender (the debt) will depend on the amount you borrowed, the interest rate charged and the length of time that you borrowed the money (the term of the loan).
Lenders will usually calculate interest charges on a daily basis. The interest is calculated by multiplying the debt that you owe each day by the annual percentage rate and then dividing it by 365. These interest charges are usually added to your loan account each month.