The loan rate (or nominal rate) is the amount you will pay in addition to the repayment of the amount you borrow. In other words, it is the cost of the loan, excluding fees, insurance, guarantees, etc.
You have the choice between 2 types of rates for a consumption or real estate loan:
- The fixed rate : it is fixed at the time of signing the loan agreement. It does not change during the term of the loan
- The variable rate : this type of rate is modified during the term of the loan.
The comparison of the offers is made on the Global Effective Rate or TEG and not on the borrowing rate and the additional costs.
Fixed rate definition
The negotiation of the fixed rate is done at the signing of the loan agreement, knows no change throughout the duration of the loan. However, fixed rate does not mean fixed monthly payments. You have the option of modulating the amount of maturities over time.
According to your contract with the financial institution you have the possibility to increase the amount of your monthly payments or to modulate them according to your incomes.
The fixed rate: a reassuring approach
Who says fixed rate says security.
Indeed, the fixed rate does not leave room for surprise. From the beginning of your loan, the amount of monthly payments is known and with the total cost of loan. You have the opportunity to efficiently manage your budget.
Regardless of rate increases in the market, your rate stays the same.
The fixed rate is above all a guarantee of security for a medium and long-term loan, that is to say greater than 10 years. The evolution of the market has no impact.
The fixed rate: a fairly rigid device
Despite all these advantages, the fixed rate is rigid.
If the market registers a rate cut, you can not profit from it. In this case, your repayment interest will be higher compared to the market.
Choosing a fixed rate costs, is also committed to pay more compared to a variable rate. The difference is 1 to 2 points, or 0.01 to 0.03%.
If you also want to make a prepayment of a fixed rate loan, it will cost you a lot. The refund penalties can be up to 2 to 3% of the outstanding capital.