Borrowing Guide
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Money Guides
How loans work
It’s important to know about all of the extra costs involved when you apply for a loan.
How much will you pay?
How much will you pay?
APR
Compare ‘like for like’
A loan consists of two parts:
• The ‘capital’ which is the initial amount borrowed
• The ‘interest’ which is the amount that the lender
will charge you for allowing you to borrow money
and repay it over a set time, the ‘loan term’
Capital + interest = total loan repayment cost.
The total loan repayment cost is usually repaid by
you making monthly repayments, for the duration
of the loan term.
£10,000
6.5%
APR
However, the loans may also be subject to other costs
– application fees, transaction fees, insurance, etc.
You need to add up all these to know the full cost of
borrowing. You also need to check whether any fees
are paid separately or added to the loan; when added
to the loan they usually increase the amount of capital
upon which interest is charged.
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Borrowing Guide
SECTION
5
How much will you pay?
APR
Compare ‘like for like’
6.5%
APR
How loans work
APR
Compare ‘like for like’
APR stands for the Annual Percentage Rate of charge.
The APR indicates the total amount of interest
payable over the year and also takes into account
certain charges that you would be expected to pay.
The APR may be set for the length of your loan (fixed
rate) or may change during the time of your loan
(variable rate).
When comparing APRs, you should only compare
on a ‘like for like’ basis: comparing similar types of
borrowing, over similar periods.
The APR will vary from lender to lender and according
to the terms of the loan. It’s the best way to compare
different loan products over the same time period.
Usually the lower the APR, the better the deal is.
£10,000
36
£11,00
3
However be aware that the advertised APR is not
necessarily the one you will be offered – as there are
other factors that may be taken into consideration
by lenders when they assess your application. These
include:
• Your credit rating
• The amount you are borrowing
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If you were to compare two loans with the same
APR but which were over different loan terms, then
remember that because the APR is the total charge per
year, you will have to pay more on the loan that runs
over the longest time. You’ll also have to check for
extra charges that are not included when working out
the APR, such as a charge for making a late payment
or paying a loan back early.
‘Typical APR’
When you see the term ‘typical APR’ this indicates
that this rate has been offered to at least 66% of
applicants who have been approved for that loan,
therefore making it the typical rate offered.
• Your employment status
• Your financial situation
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Money Guides
• The length of your loan term
• Your relationship with your lender
Payment Calculator
Use this payment slide calculator which allows
you to compare monthly payments at different
interest rates over different terms.
The final rate you are offered will depend on the
‘risk’ the lender feels you represent. Obviously not
all applicants are successful.
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