WHAT IS FIXED RATE?
In a layman's term, Fixed interest in a loan means a constant interest rate fixed within the term of the loan period. If NDB charges 4% fixed interest on all loan products, then the 4% interest will be fixed for the life time of the loan until it is completed.
Let me give an example of a fixed loan.
If you borrow K10,000.00 at a fixed interest rate of 4% for 3 years.
I.e
K10000 x 4% = K400
Loan payable = K10400
If you agree to pay monthly..
3 years = 36 months
So K10400 ÷ 36 = K288.89
So for monthly you will pay K288.89 until you complete the loan in 36 months
So now we note that at fixed interest, it's simple and the loan payable is also fixed per month until the loan is fully completed.
Just Note that if the interest rate is fixed annually, you need to calculate it on fixed terms annually. the amount would change also.
WHAT IS VARIABLE INTEREST?
Variable interest is when the interest rate fluctuates over time or per period of the loan. Variable interest is quite tricky and involves a lot of calculations. Kina Bank is offering its SME loan at variable interest rate of 4%.While they did not specify it is annually or monthly, let's assume they are offering it annually.
Now if you wish to borrow K10,000.00 at 4% variable interest for 3 years.
with variable interest, the interest is added every year on the remaining balance.
Let's calculate.
K10000x 4% = K10400
In actual spreadsheets Calculation, You will have to pay principal and interest separately.
Principal K10000.
K10000 X 4% = K10400
K10400÷36 = K288.89
For first Year you pay K288.89
K288.89 x 12 = K3456
and you will be left with K6533 for the next 2 years
Then you do Calculation again from the K6533 at 4% interest.
K6533 x 4% =K261.
K6533 + K261 = K6794
K6794 ÷ 24 months = K283
So for the next remaining 2 years, you will be paying K283.
However, since its annual variable interest, you will have to pay the K283 for only 12 months before it changes again in the final year.
So in the final year, you will be left to pay K3398 as per the calculation below.
K283 x 12 = K3396
K6794 - K3396 = K3398
As given, you will be left with only K3398 for the final year, so we calculate again.
K3398 x 4% = K135
K3398 + K135 = K 3533
K3533 ÷ 12 = K294
Finally you will be paying K294 until you complete your payment for the last remaining year.
So in total you would be paying
K3533 + K3398 + K3396
= K10327
You will now note that with variable interest, you will pay less than at fixed interest.
WHICH LOAN INTEREST RATE IS BETTER?
I will not recommend any of the above two but A variable interest rate loan benefits borrowers in a declining interest rate market because their loan payments will decrease as well and you could pay les. Sometimes in vulnerable economy like PNG, it is unlikely that interest rate would go any lower.
However, to be on the safe side, it is better to go for Fixed interest with unpredictable economic shocks in market that could put pressure on banks to increase interest rates on variable interest loans.
INTEREST RATES ON SME LOANS IN PNG
1. NDB = Fixed 4%
2. BSP = Fixed 5%
3. KINA BANK = Variable interest 4%
VISIT ALL YOUR NEAREST BANKS TO CONSULT ON LOAN PRODUCTS AND THEIR INTEREST RATES TO HAVE BETTER KNOWLEDGE.
DISCLAIMER; The above informations are my personal views only and does not represent any organizations mentioned.
Good Luck
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