Importance of Interest Points
What is the difference between a single percentage point of interest? Many
people have problems grasping exactly how much a percentage point means. But the
pound value of a percentage in interest is substantial, and a single percentage
point can make a huge difference in how much you pay over time for the
For example, a £10,000 loan at 6% interest over the
course of 10 years adds an additional interest of £3,322. A 5% interest
rate, however, has additional interest of only £2,728. That's a
difference of almost £600 pounds due to only a single percentage point.
And the amount increases by small increments over time. A 7% interest rate is a
difference of over £600, and a 10% interest rate is over £2,500 more
than a 6% interest rate.
The numbers add up, and finding a loan with
a lower percentage rate can make a huge difference in the amount of money you
are paying over time.
Importance of Loan Term
term affects how much you pay as well. Let's look back at the example of a
6% interest rate. For a 6% interest rate over 10 years, the interest was £3322.
However, if we had shortened that to only 5 years, the interest would have been
only £1600 - less than half of the original interest.
difference with loan term, however, is monthly payments. For the 5 year loan,
the monthly payments must be £193.33, while for the 10 year loan the
monthly payments were as low as £111.
Here is where your own
personal budget comes in. If you can afford to make the
higher monthly payments, then you want a shorter loan term because you end up
paying significantly less overall. However, if you believe there is a chance you
will not be able to make a payment if you choose the shorter term, you will want
a longer term, despite how much you need to pay back, because missing a payment
in many instances can bump up your interest rate, resulting in the significant
increases we discussed earlier.
Things like interest rates and loan terms should never be
undervalued. That is why it is important to compare loans
considerably before you take them, so you can be sure that you are getting
the cheapest interest rate at a term that will not strain your budget.