Borrowing Money
Fixed Rate Loans
Fixed rate loans are loans whereby the interest rate is fixed for the
duration of the loan. In other words, no matter what happens in the
financial markets, the interest rate remains the same. As a rule of
thumb, fixed rate interest loans are attract a slightly higher interest
rate than would a variable interest rate taken out at the same time.
What you miss out on with a lower interest rate (that you would have
from a variable interest rate loan), you make up on in security in the
sense that you will always know what rate of interest you will be paying
over the life of the loan. Even if the market interest rates double
or triple while you are still paying off the loan, your interest rate
remains the same as the day you signed the loan agreement.
Variable Rate Loans (adjustable rate
loans)
Variable rate loans are tied to the current market interest rates,
and have a tendency to go up or down depending on the current financial
influences of the day. If, for example, you take out a 10 year variable
interest rate loan starting at 5%, you could end up paying twice the
interest rate for periods of the loan if the market conditions worsen.
Of course, market conditions could also go in your favour, and therefore
you would end up paying less interest, but this is the gamble with variable
interest rate loans.
Hybrid Loans
Hybrid loans give you the best of both worlds – a fixed rate
of interest to start with, and then moving on to a variable rate later
on. The major benefit of a hybrid loan (one that starts the repayments
at a fixed interest rate) is that the borrower can budget at the beginning
of the loan for a specific repayment amount. Particularly with home
buyers, having a fixed interest rate for the first few years of the
loan helps immensely with budgeting and managing their finances. After
the specified fixed rate period ends, the loan reverts to a variable
interest rate loan, and is subject to market fluctuations. The length
of time for the fixed rate portion of the loan will vary depending on
the lender, as will the interest rate, so if you’re in the market
for such a loan, take your time and shop around to get the best deal.
Revolving Credit Loans (Lines of Credit)
Revolving credit loans can essentially be likened to credit cards or
an overdraft. The lender will specify an amount of money that the borrower
can loan, and the borrower can repeatedly take out money up to that
amount – just like on a credit card. For example, if a lender
agrees to a loan of $100,000 on a revolving credit basis, then as long
as the borrower continues to repay the loan, they are free to keep taking
out money as long as they don’t go over the $100,000 limit. So
if they have paid off $7,000, they have $7,000 that they can take out
again at any time without having to contact the lender or sign any agreements.
You can ‘dip’ into your credit amount at any time, for any
reason. Of course, the borrower will continue to pay interest on the
loan, so if they continue to take out money to the limit of their loan,
they are simply exacerbating the total cost of the loan and extending
the amount of time it will take to pay the loan back.
|
