When a headline interest rate might be misleading. What to look out for and how to find out the real cost of a loan.
You’re looking for a loan. You want the best value. Best value means lowest APR. Right? Only partly. The annual percentage rate tells you what you’ll pay to the lender every year, and by law this figure must include all charges included in the package. So if there’s an annual fee, for example, payable each 12-month period during which you owe money to the lender, this would have to be included in the APR, as would any set-up fee. In other words, the interest rate and the APR are two different amounts, unless there are absolutely no charges. However, as the APR includes the interest rate, it cannot be lower. APR can be used as a basic way of comparing one loan with another, and is required by law to be used in advertisements for all loans.
So that’s the basics. But of course, if we used only the APR to determine which loan to take out, we’d all use the same loan – the cheapest. Since that doesn’t happen, there must be other factors. Not covered by APR disclosure regulations are the various charges that are added to loans on a voluntary or penal basis. It’s quite normal for a loan provider to offer insurance on the loan, so if you lose your job or become ill you’ll have the loan paid off while you have no income. All well and good, but make sure you read the small print as there could be conditions – say, maternity leave – where you won’t be eligible. There are also charges for missing payments, which can be quite high, even if you’re just a day late. It all adds to the price of the loan.
You might decide to settle your loan earlier than planned. This could mean more fees, but still might work out cheaper than continuing to pay off the loan as normal unless you’re close to the end of the term.
Another favourite with the loan providers, and especially with hire purchase agreements, is the introductory offer. You might get a good rate for the first 12 months, but this might then rise. It’s sometimes worth taking advantage of a low rate and paying a settlement fee and transferring the loan. Other loans vary with Bank of England base rates, but this is generally restricted to long-term loans and mortgages.
So use APRs as a basic guide, but when you’ve decided on three or four products, delve into the small print. It’s these details that could make the difference over five years.
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