Greg and Sarah are looking hard at the interest rates currently available. They could take a loan with a fixed rate for two years where the interest is one percentage point below the floating rate. On their $150,000 loan, Greg calculates that opting for the fixed rate will save them around $3,000 over the two years, assuming the floating rate doesn’t fall.
But could they cut their interest bill even further by taking a much longer fixed term rate? Sarah isn’t so sure. She has some relatives who took a five year fixed interest loan a few years ago when the fixed rates were lower than the floating rate. But well before the five years was up, the floating rate had fallen to below the interest rate her relatives were paying.
Greg and Sarah talk to the staff at their bank, and find that the bank’s economists are recommending two year rates. With no strong reason to take a longer fixed interest loan, Greg and Sarah settle on a two-year term.
The amount of interest you pay on a loan or are paid for an investment, usually expressed in a percentage.
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a fixed rate loan, the interest rate is set at the date you take out your loan and remains the same throughout the term of your loan, irrespective of whether bank interest rates rise or fall.
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a floating rate loan, the interest varies from time to time. If interest rates fall, then so does the amount you have to repay. Or you can choose to continue with the same level of repayment and reduce the term of your loan. However, if interest rates rise, then the opposite effect happens, either your repayments need to be increased or the term of your loan is extended.
