There are many different expressions regarding interest rates, and knowing what you need to keep track of can be challenging. This article reviews the variance between fixed and variable interest rates, what effective and nominal interest rates mean, and what repo rates, deposits, and lending rates mean.
Different Kinds of Interest Rates
The interest rate is a percentage of the total loan amount. This type of interest rate is called a lending rate and is perhaps what you usually think of when discussing interest rates.
When you deposit money in a bank account, for example, in a savings account, the bank instead pays interest to you. It is called a deposit rate or savings rate. Currently, savings rates are generally meager because the repo rate is so low.
The repo rate, called the critical interest rate, is a market rate controlled by the central bank. It is also the rate of interest that the banks may borrow from the central bank, which in turn affects the interest rate on your loans.
What is the Difference between Effective and Nominal Interest rates?
The nominal interest rate is the interest rate for the loan and is usually referred to as the annual interest rate. When you take out a loan, the nominal interest rate can also be interest, rate of interest, or credit interest.
Most often, however, set-up notification fees or other fees make the total cost of the loan higher. It means that the total interest rate will be higher, called the effective interest rate. It is always the effective interest rate you should start from when considering taking out a loan.
What is the Difference Between Variable and Fixed Interest rates?
The interest you pay can be both fixed and variable. If you choose a fixed interest rate on your loan, it means that you pay the same interest rate throughout the term, regardless of whether the policy rate goes up or down. A variable interest rate means that the repo rate governs the interest rate, and your interest expense can vary during the loan term.
It also means that the banks want to protect themselves from making a loss-making deal. It has been seen that historically, the variable rate of interest is much better than the fixed rate of interest.
Which Lender has the Lowest Interest Rate?
No bank gives everyone a low interest rate, but different banks target different target groups. Even if your friend or neighbor has received a top interest rate from a lender, it does not mean that you also must get it. This is because all banks have models and strategies for assessing risk among different customer groups.
It means that slight differences in your life can affect the interest rate you receive. The most effective way to assess which lender gives you the best interest rate is to compare loans with several lenders via a loan intermediary. In this way, you increase the chances of finding the best lender for you.
What Affects Your Bank Interest Rate?
The interest rates the banks offer you are based on the probability that you will repay the money. If they judge that there is a high risk that you will not repay the loan, you will be offered a high interest rate – or not receive any offer at all. If they judge that you are a secure customer, you will probably get a reasonable bank interest rate.
When banks calculate the probability that you will repay the loan, they consider your creditworthiness and your ability to pay. Based on these two parameters, the lender assesses your risk profile, which they then set the bank interest rate based on.
How do You Increase the Chances of a Reasonable Interest Rate?
If you want to lower your bank interest rate, you can do some simple tricks to improve your credit rating. If you have several loans and credits, you can “clean up your finances” by collecting your loans and credits into a single sizeable private loan. Since the bank prefers to see that you have a larger loan than several small loans, you improve your credit rating when you collect your loans. In this way, you can often lower your average interest rate.
If you make sure not to take out any new loans, there is also a good chance that you can lower your interest rate further a year or so later. You can thus gradually improve your credit rating and interest rate by collecting your loans.
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