How You Can Reduce Your Interest Rate

In order to understand how to reduce your interest rate, it is important to first take a look at what interest rates really are. Interest rate is the price that a borrower pays for, or a lender receives from, the use of money in a loan agreement. The loan lender earns an income by lending out the money to the borrower, who pays the loaned amount plus interest.

Every country’s market or nominal interest rate is determined by various economic forces, such as inflation, deflation, and simple supply and demand issues. There is no one single interest rate for any country or market. The best known interest rates are those for government bonds, home mortgages, credit cards and overdraft borrowing. In South Africa, with its market-oriented economy, the rates of interest need to be sensitive and flexible to different aspects of market forces. Interest rates in South Africa, as in many other countries, are affected by political, social and economic events in other countries. The two reasons for high interest rates in South Africa are the population’s low saving ratio and the countries high inflation rate.

In South Africa, the Prime Lending Rate as of February 2010 was at 10.5%. This amount is somewhat misleading, as interest rate is not calculatedly yearly, but monthly. You will need an interest rate calculator to determine exactly how much interest you will pay over the course of a year. The main method of reducing your interest rate is to refinance your mortgage loan with a lower rate of interest. Remember that there are two types of loans available, those with fixed interest or variable interest. Fixed interest loans are made with an unchanging interest rate for the duration of the terms of the loan. Variable interest loans are just that, loans that have a variable rate of interest. You can refinance either type of loan to obtain a more favorable rate of interest. One of the first things you should do when deciding to refinance a loan is contact your current lender and try to negotiate with them the waiver of closing costs. There are many sites online which offer services to compare and contrast loan lending institutions, as well as make online applications for loans possible.

It is when mortgage rates are low that you should consider refinancing. Some suggest that the interest rate should be at least 2 percentage points lower than your current interest rate in order for it to be worthwhile. However, it really depends on whether the lender will cover closing costs, on how much better the new interest rate will be and on the term of the new loan. The amount of time needed to repay a loan is a crucial factor in determining the interest rate of the home loan. The longer the loan is for, the higher the interest rate on that loan. When applying for a loan or refinancing one it is wise to determine is a 3 year, 5 year, 15 year or 30 year loan is right for you.