The interest rate is the ‘cost’ of borrowing money. So if someone loans you $100 at a 10% interest rate per annum, in a year you will owe that person $110.

No matter what kind of loan you have, you should know the interest rate. If the interest rate isn’t clear on your bill, ask the lender what it is. Some payday loans actually have an annual interest rate of more than 400% which is definitely something you should be aware of!

Often if you pay late or miss repayments, your interest rate will increase and you will pay fees. A higher interest rate could mean paying hundreds of dollars more on your debt.

Types of interest
The type of interest you pay will depend on the product and the lender. There are four main types of interest:
  • Fixed interest – a set interest rate which does not change over an agreed period.
  • Variable interest – an interest rate that can go up or down over the term of the loan.
  • Interest-free days – Some credit cards offer interest-free days; others charge ongoing interest. It’s a set number of days (eg ‘up to 44 days’) before interest is payable on your purchases. If your purchases are not paid off in full by the end of the interest-free period, interest then applies to the entire balance owing.
  • Ongoing interest – an ongoing rate of interest which usually applies from the date you make the purchase. Generally, these cards have a lower interest rate than those with interest-free days.

Credit card interest rates
If you need to use credit cards, shop around for the best rates and product features. If you find offers for very low rate credit cards, make sure to check how long the rate is valid for and what the rate will be after the introductory period.

Remember, credit card companies will seek to make money from lending you money, so check the fine print and make sure you understand the terms and conditions.

Comparison rate
The comparison rate on a loan includes interest and most (but not all) fees and charges associated with the loan. For example, if a bank advertises an interest rate on a home loan of 8.00%p.a., the comparison rate (once fees and charges have been taken into account) might actually be something more like 8.15%p.a.

Find out more about comparison rates at www.creditcode.gov.au/content/downloads/factsheet.pdf


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