Loans are a simple form of finance with a fixed term and the bank decides how long and by that how much a person will have to pay each week, fortnight or month. So, paying the loan off is compulsory, unless the loan has been defaulted or redrawn, and it will be paid off within the time specified by the bank.
How much does a loan cost?
The main cost of a loan is the interest charged. And interest rates can go anywhere from 8% to 16% depending on how risky the bank considers the loan to a specific person. So, if the person is on a low income with no assets to give as security, the bank will determine a higher interest rate.
On top of interests a person is also likely to be charged set-up and on-going fees and these fees can add a significant amount to the cost of the loan. A comparison rate shows the total cost of the loan, including fees and charges, as an interest rate only. So, this can make it easier to compare the total cost of a loan between different loan products and lenders.
How to minimize the cost of the loan?
The most important thing a person has to know about loans is that the interest charged is compound interest, which is an interest calculated multiple times during the life of the loan (usually every day).
Compound interest is calculated when the outstanding balance of the loan is multiplied by the interest rate. So, the lower the outstanding balance, the lower the amount of interest paid. According to this, a person can reduce the outstanding balance of the loan by paying more at the start of the loan. On the other hand, if a person makes lower payments at the start and higher payments at the end of a loan the interest paying will be higher.
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