This is exactly what most of us are looking for, we want to take as cheap loans as possible. Of course, cheap loans are much nicer and better than expensive loans, but what really makes loans cheap and how do you go about finding cheap loans? We shall try to clarify this here.
What Makes Cheap Loans Cheap?
There are several things that affect how much your loan will cost you. To understand what makes cheap loans cheap and expensive loans less cheap, we divide it into the various factors that play into it.
What first and foremost determines how much a loan will cost you is the interest rate. It is not much more complicated than that. A high interest rate gives a more expensive loan and a low interest rate gives a cheaper loan. The interest rate is set by banks and lenders and varies from bank to bank but also between different types of loans and in different situations.
The loans that have the best interest rate are almost always mortgages. A mortgage is a secured loan, which means that your home is the bank’s security when you borrow. If you are unable to pay your loan, the bank can get back your money by taking / selling your house and picking up what you owe. You can also borrow by car, motorcycle, boat and other valuable gadgets as collateral and all these types of loans have relatively low interest rates. And low interest rates mean cheap loans.
You can get higher interest rates on some other types of loans
If you have one or more payment notes, this will also affect the interest rate. The lenders who lend to people who have payment complaints will often charge a slightly higher interest rate due to the uncertainty.
In addition to the interest rate, you will also have to pay a number of different fees in connection with your loan. There are, for example, setup fees, notification fees and sometimes some other fees depending on the bank and type of loan. It is important to remember that these fees can have a great impact on the total cost, especially if these are recurring fees and you have to borrow for a longer period. For example, you can avoid the notification fee by paying via direct debit. When comparing cheap loans, always make sure you include all fees.
Effective interest rate is a concept that is slightly different from ordinary interest rate. Effective interest is a measure of a loan’s total costs calculated on an annual basis, where you include both interest and any other possible costs of the loan.
The effective interest rate is thus a measure of the total cost of the loan and this is a very good measure to use when comparing different loans in the search for cheap loans. One of the few cases where effective interest rates are not so good is in those cases when you borrow a very short period, such as a month. Then the effective interest rate can be misleading, since it is normally calculated over a full year.
The length of the loan
The length of the loan will also affect how much it costs in total. If you borrow USD 100,000 for one year and pay off the same amount each month, your monthly loan will decrease by USD 8300, which means you pay interest on a significantly smaller amount all the time.
If you borrow the same USD 100,000 for 5 years, you will repay significantly less amount and thus have to pay more in interest altogether. Then this does not necessarily mean that a shorter loan is better, but you should always keep this in mind when looking and comparing cheap loans.