Angela Dye explains the difference between principle and interest, interest only, fixed rate and variable rate loans, and also gives us insights on how interest is calculated and what a comparison rate is.
Q: What is the difference between principle and interest and interest only?
With a Principle and Interest loan you are paying the interest charged on the loan as well as a portion of the principle. This means that throughout the term of the loan you will slowly pay off the amount that you originally borrowed, as well as the interest charged for using the money for the term of the loan.
The loan will have a contractual payment which states that on a specific day of the month you will make a specific payment, for example, on the 27th of the month you will pay $2,500 for the term of your loan.
An Interest Only loan is exactly what it says; a loan where you are only committed to pay the interest that is charged on the loan.
Q: How is the interest on a loan calculated?
Interest is calculated daily and usually charged monthly on the outstanding balance of your loan. If you only pay the interest and no extra payments, your loan principle will remain the same. Interest Only loan terms are usually up to five years of your total loan term.
Q: What is a variable interest rate?
A variable rate is a loan where the interest rate moves up and down as the market interest rate changes. There are usually no penalty fees if you discharge this loan early.
Q: What is a fixed rate loan?
A fixed rate loan has a specified period where you will have the same rate regardless of the market rate moving up or down. During this time if you discharge your loan you may pay penalty fees as you will have broken your fixed rate contract, for example, a three year fixed term.
Q: What is a comparison rate?
The comparison rate is an indicative rate that will help you to determine the true cost of the loan. It includes all the costs of the loan such as, interest rate, monthly fees, annual fees and any other fee payable on your loan.
It is always important to talk to a professional when deciding which loan is best for you as each person’s situation is different. Check out this article for more FAQ answers.
If you are looking for a loan or simply want to find out what is available for your needs
call Angela on 0414 608 970 to discuss your situation, email info@richmondresidential or make an zoom appointment at a time convenient for you using one of the links below.