For organisations to profit and cover the risks involved in lending out money, they will charge you interest, fees and charges.
Interest may be calculated on either the amount of money you have borrowed or the outstanding balance. Your balance can include accumulated interest, which means you might find yourself paying interest on interest. Generally, the more money you borrow, the longer it takes to pay off and the more interest you accrue.
The type of interest you pay will depend on the product and the lender. Personal loans usually have fixed interest or variable interest.
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.
Some credit cards offer interest-free days; others charge ongoing interest.
Interest-free days – a set number of days (for example, 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.
Usually you will have to pay fees and charges as well as interest. Fees and charges can include: annual fees on credit cards, administration fees on personal loans and redraw fees/early repayment fees on mortgages.
To find out the real cost of your credit, enter your details into the Credit Card Cost Calculator.