What to choose: lower interest rate or lower commission?

Many people looking for a loan choose expensive offers, despite looking for the cheapest solution. This is because people focus mainly on interest rates. However, its height may be misleading. This will especially affect short-term loans.

In the case of loans taken for several months, comparing interest rates only does not make sense. In this case, interest represents a relatively small proportion of the total costs. A loan with a much lower interest rate may therefore prove more expensive if a higher commission has to be paid for it.

How to get lower interest rate?

How to get lower interest rate?

Let’s assume that we can use two loans for PLN 5,000 for 3 months. The interest rate on one is only 5%, and the other as much as 20%. However, to get the one with a lower interest rate, you have to pay a 5% commission. The difference in interest rate is so huge that it may seem that it is worth paying a higher commission and using the first loan. After adding up the costs, it turns out that despite such a low interest rate, the second loan is up to PLN 124 more expensive.

Interest rate of Credit card

Interest rate of Credit card

A similar mistake is often made by people who can pay by credit card, but choose a cash loan. The interest rate on credit cards is often 20% per annum, and cash loans – around 15%. So it is as much as ¼ lower. However, you must pay up to 5% commission for the loan. The fee for the card is about PLN 60 per year.

Let’s assume that we also need PLN 5,000, but for 6 months. Calculations show that also in this case a product with a higher interest rate is cheaper. The sum of the costs associated with using the credit card will be lower by PLN 115, even if we assume that you will have to pay this fee.
It should be added, however, that the rule described applies to loans for short periods. The situation is completely different in the case of long-term loans. If we take out a mortgage for 25 years, even the interest rate is lower by 0.5 points. percent. is of great importance.

Let’s assume that we take out a mortgage in the amount of PLN 300,000 for 25 years. This time we can choose a loan with an interest rate of 6% and 6.5%. To get the one with a lower interest rate, however, you have to pay a 3% commission. This time it is more profitable to pay a commission and choose a loan with an interest rate of 6%. In this way, we will save up to 18 815 PLN.

A lower interest rate with a higher commission is profitable because here the interest is accrued over a long period, and therefore constitutes the majority of the cost of the loan. Regardless of the type of loan, the best way to find the cheapest offer is to compare all costs – both interest and commission. If we don’t have time for it, a financial advisor can help us with this.

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