Define finance rate12/1/2023 ![]() The true cost of your loan is known as the effective interest rate (EIR), which may be higher than the advertised rate because of the way interest is calculated. Do factor this in when deciding if you can afford a loan.Įffective interest rate (EIR) - what your loan actually costs If interest rate moves up, your interest expense will be higher. Notice that the interest portion of the payment reduces as time goes on.įor a fixed rate monthly rest, the interest rate stays the same for a period of time known as the lock-in period.įor a floating rate, the interest rate can move up or down. ![]() Here's what your payment schedule might look like for the first 5 years. Say you have a $600,000 loan payable over 20 years at a fixed rate of 3.5% per annum, and you have to make 240 equal monthly repayments of $3,480. Monthly rest is commonly used for home loans. As you pay down your outstanding loan amount every month, the interest also reduces over time. With monthly rest, interest is calculated based on the outstanding balance of the loan. Notice that you'll end up paying more interest for a 7-year loan than for a 5-year loan. The monthly interest stays the same throughout, even though your outstanding loan reduces over time.Ī flat rate is commonly used for car loans and personal term loans.īelow is a calculation for a $90,000 car loan at 2.5% interest per annum flat rate. With a flat rate, interest payments are calculated based on the original loan amount. Learn about flat and monthly rest rates, and how they affect interest calculations. ![]() Remember, for the same amount borrowed, you pay more interest for a longer loan period than for a shorter loan period. Apart from the interest rate, consider the processing fees, legal costs and other charges due to late or non-payment. Check the repayment schedule before signing up.īefore taking out a loan, think about the interest payments.Use the effective interest rate to compare different loans to get the best rate.Usually, you pay more interest for a loan with a longer tenure than for one with a shorter tenure.Loans are not free money and must be repaid with interest.
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