The cost of borrowing

Finding out how much extra you’ll have to pay.

A lender, such as a bank, is normally a business that provides products and services related to money. If you borrow money from a lender you have to pay it back plus interest for the use of the money. You may also have to pay fees when you set up, change or repay your loan.

Interest rates for different types of loans

The amount of interest you pay for a loan will be determined by the interest rate set by the lender. Lenders consider a number of things when deciding the interest rate, including the risk of the lender not getting their money back (default risk). The interest rates for home loans are usually lower than other loans because you give the lender a mortgage over the house. This means they can sell your house and get their money back if you don’t pay back the loan. Personal loans and credit cards charge a higher interest rate because they are not secured in the same way, so there’s a higher chance the lender won’t get their money back.

Interest paid vs interest rate

Interest paid is the total dollar amount of interest you paid over a certain time, such as a month, or the life of the loan.

Interest rate describes how much interest you’ll pay as a percentage of the money you owe. A typical loan might charge around 10% p.a. The p.a. stands for per annum, which means per year. At 10% p.a. interest, if you owed $1,000 throughout a year and made no repayments you would pay $100 for the use of the money. Because you normally repay some of the loan from time to time, the lender usually works out the interest on a daily basis, and at your chosen payment frequency, (e.g. weekly, fortnightly or monthly) charges you the interest you owe for that period. If your interest rate doesn’t increase as you pay back the loan, the amount of interest you pay each charge period will get less.

Total cost of finance

When you’re looking for a loan you could be attracted to a very low interest rate. These rates, often referred to as teaser rates, are generally designed to lure you towards that bank or lender. It’s important to understand exactly what you are getting into. Here are some questions that’ll help you figure out the total cost of a loan.

  • Is there a ‘lock-in’ period?
  • What is the interest rate going to be after the introductory period?
  • What fees and costs will you need to pay during the course of the loan (see below for examples)?
  • What is the total amount that you will pay for interest plus principal (the amount you borrowed) during the course of this loan?
  • Will you have to pay any charges if you want to make lump-sum repayments or repay the loan ahead of schedule?
  • What are the benefits you’ll receive, such as Air New Zealand Airpoints Dollars™ or Fly Buys Points?

Common fees and charges

There are three main types of fees associated with accounts, loans and credit cards. These are account, service and facility fees. They can have different names at different banks. All fees can change from time to time. At any one time the amount charged (if any) for a particular transaction, service or facility can vary between different accounts, loans or credit cards.

  • Account (or base) fees - these are charged each month to cover the administration of your account and any transactions you have made that incur a fee, such as withdrawing cash, or withdrawing more than your borrowing limit
  • Service fees - when you request a service on your account, loan or credit card, that service may have a fee associated with it. Service fees might be charged whenever you:
    • Apply for, or establish a loan
    • Re-fix the interest rate after a fixed interest rate period ends
    • Top up (increase) the overall value of your loan
    • Re-document the loan when you change things like the loan product, the borrower or the type of repayment
    • Lose your EFTPOS or credit card and order a replacement
    • Request another copy of a monthly credit card or account statement
    • Ask the bank to set up an automatic payment or bill payment
  • Facility fees - These are charged for providing an overdraft facility on a transaction account, or when an account goes into overdraft.

Credit card fees

Here are some of the fees that you should ask about before choosing a credit card.

  • Annual account fee - usually charged monthly or half yearly
  • Cash advance fees
  • Foreign currency conversion fees - these apply when you get foreign cash advanced or make a purchase in another currency
  • Additional cardholder fee
  • Late payment fees
  • Card replacement fee