Two of the first things business owners look at when arranging finance are the interest rate and the repayment amount. Together they largely decide whether a loan is affordable. Here's why both matter and how to weigh them up.
The interest rate: the cost of borrowing
The interest rate is the percentage a lender charges for lending you money. It varies with the type of finance, the loan purpose, the lender and your circumstances. Generally, a lower rate means you pay less interest over the life of the loan.
But the rate isn't the whole picture:
- A loan with a low rate can carry other fees or restrictions that make it less attractive.
- The lowest advertised rate may not be available to your business.
- Whether repayments are made in advance or in arrears can change the repayment amount for the same rate.
That's why it's worth comparing several options, which is where a broker with a panel of lenders can help.
The repayment: can your business carry it?
A lower repayment can make a loan easier to manage and protect your cash flow. But a lower repayment often comes from a longer term, or from a balloon, which is a larger final payment due at the end. Both can increase the total you pay or leave a big amount to find later. It helps to know the purpose of the loan and your plan for the end of the term before you choose.
Finding the balance
There's no single right answer. The best structure depends on your cash flow, what the asset earns, how long you'll keep it and your plan for the end of the term. Compare the total cost of each option (interest, fees and any final payment), as well as the repayment.
At Even Financial we compare options from a panel of lenders and talk through the trade-offs with you, so you can choose a structure that suits your business. Send us an enquiry to get started.