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20
Nov 18

6 Interest Myths Debunked!

by Lachlan Hayes
Interest blog covers4

The world is full of myths and superstitions. Some can be interesting. Some can be silly. And some can be just plain bizarre; we even have television shows dedicated to them! It can a bit of fun to turn a blind eye to the facts and indulge ourselves with the possibility that a myth might actually be true – like Bigfoot or the Loch Ness Monster, but other times it’s important that we know what's true, especially when it comes to our finances - so let’s bust some interest rate myths!

Will securing my loan lower my interest rate?

In most cases, yes, securing your loan will help you lock a lower interest rate. Given that lenders use security as a way to cover themselves if you don’t repay your loan, they don’t need to charge as much interest initially. This is because when you secure your loan, the loan is less ‘risky’ for the lender. Depending on the lender, they may not offer to reduce your interest rate if you secure, and instead may give you access to lower monthly fees, or the opportunity to borrow more money.

What are introductory rates?

Introductory rates are temporary rates that banks and lenders use to attract customers to sign up for a financial product. In regards to savings products, such as term deposits, banks will usually offer a higher-than-usual rate to entice customers to deposit their money with that bank.After a certain amount of months, the bank may lower that rate to well below the average rate. This essentially means that what may have initially seemed like a great deal can turn out to be not as beneficial in the long-run compared to a fixed or flat rate. Banks and lenders will do this for credit products too, although it will work in the reverse – they will offer very low rates for a limited time and then increase the rate in the future such as a '3-month interest-free period' offer on a credit card.

How does the bank pay me interest?

When you put your money into a savings account, it’s recorded by the bank, however, there is no mysterious vault underneath the bank with your name on it. All this money gets pooled together and is then used by the bank to make investments, which are usually loans. To a bank, a loan is an investment because it makes them money in interest. Now you might be thinking, “Wait that’s my money! Shouldn’t I get something in return?” Well, you do! As the bank uses your money to lend to other people, they make money from this and in return give you a portion of it back in your account. This usually occurs at the start of each month and compounds every month after that meaning you start getting paid interest on top of your interest.
Interest Life Cycle

Does interest from investments and your savings account count as income?

The short answer is yes. Interest earned on investments and savings counts as income and should therefore be included in your individual tax return each year. This means that depending on your total income for the financial year, you may even get taxed on your interest!

Will putting more in my savings increase my interest rate?

Putting more money in your savings account will increase the amount of interest you make on your savings, however, it may not actually affect the rate; that depends on the product. For most savings accounts, banks will offer a higher rate when you increase the balance of your account by a certain amount each month. Banks will do this because it may encourage you to save more so that they have more money to use for investing. Ultimately though, it’s a win-win – the bank can make more investments and you get a better return on your savings! The interest rate tiers are usually on the back of your statement. And who knows, you might be closer than you think to moving into a higher tier, which would generate more interest!

What’s a comparison rate?

When you see an ad for a credit product, say a personal loan or car loan, you may have noticed that banks and lenders will offer two different rates – an interest rate and a comparison rate. While the interest rate is the amount of interest you pay on the loan, what is the comparison rate? Well, a comparison rate is the true cost of the loan. This is done by getting the interest rate and including most of the fees and charges associated with that loan into one simple to understand rate. For example, if a loan has a rate of 9.99% and an application fee of $195, the comparison rate would be around 10.27% as it includes the interest and also the establishment costs in one. This gives you transparency so that lenders can’t secretly charge you high fees that you didn’t know about – the comparison rate will give you the full picture of how much it will cost.

Pioneer fact: did you know that when advertising the rate for a credit product, it is required by law to display the comparison rate but not the interest rate?

These might pique your interest.

Hopefully we’ve managed to debunk some interest myths, and potentially share interest(ing) information about interest on financial products. However, if there’s something else you would like to know about interest rates, contact us to have a chat, and remember to check out our related topics below:

What is Interest and Why Does it Exist?
The Different Types of Interest Rates.
Good Interest vs. Bad Interest.
 

Disclaimer: Any information provided in this blog is of a general and informative nature only. While all reasonable care has been taken by Pioneer Credit Connect in compiling this information, Pioneer Credit Connect makes no representations or warranties, whether express or implied, as to the accuracy or suitability of the information contained in this blog.