Loans may be structured several different ways but the two most important aspects to consider are the interest rate (type and method) and the repayment schedule for the loan.
There are two options to set your interest rate:
- Fixed Rate
With a fixed rate the interest rate (i.e. the percentage) applied to the outstanding principal remains constant through out a predetermined period that may or may not equal the length of your loan. The interest rate is set at the beginning of your loan by examining the risk involved and the current market rates. The advantage of a fixed rate loan is that your interest rate is fixed and the payments constant and they will not rise if the market rate rises. The disadvantage is that you will not benefit from a decline of the market rate.
- Variable interest rate
With a variable interest rate the interest rate applied on the outstanding principal amount fluctuates in line with changes to the Bank Base Rate or LIBOR and, as a result, so will the amount of your payments. The interest rate for each period will be the current market rate plus a predetermined premium that remains constant throughout the life of your loan. The advantage of a variable interest rate loan is that you save money when the market rate decreases. The disadvantage is that you are not protected from an increase in the market rate and the interest you pay will increase with the market rate.
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