What is Interest?

If you borrow money from your bank (in the form of a personal loan or credit card), you will be charged a certain amount of money on top of the amount you owe. In this situation, interest is the price you pay for being able to borrow the bank’s money. Sometimes interest is described as an ‘annual percentage rate’ (APR), indicating the interest applicable for a year.

But if you deposit money with your bank (e.g. into a term deposit), your bank will pay you interest – this is because the bank is paying you a return for depositing money with them.

What does Fixed and Variable Interest mean?

A list of terms explanations that you may see on your loan contract are listed below.

Fixed Interest Rate
This means that the interest rate is fixed and can not go up or down for the period of the loan. However, if the loan is for a home or land than you can only fix the interest rate for a period of time. Most home loans have a variable interest rate.

Variable Interest Rate
This means that the interest can go up or down during the life of the loan. This can only occur when the Reserve Bank raises official interest rates and the lender decides to pass the rise onto their customers. The lender must notify you in writing if they are going to raise interest rates.