Essentials of Borrowing
Personal Loans and APR – Is that all that matters?
The advice from financial advisers has always been, if you are thinking about taking on new loan or any type of credit agreement, shop around. These days, there is such intense competition among lenders to get your business, that special offers and extremely low interest rate loans are always on the market somewhere, if you are willing to search them out. It is also worth checking out less well known lenders and not just the high street banks, as some of the best deals around will be from these lenders. The government has sought to facilitate this by providing a standard benchmark figure that can be used to price loans from different lenders. This figure is the APR, or annual percentage rate for interest on the loan. It is calculated in the same way by all lenders and should give you an accurate and fair view of the real cost of any credit you take on.
So for instance, if a credit card is tempted to tell you that they only charge two per cent interest, they will have to tell you that this is their monthly rate, and the APR is in fact, something more like twenty eight per cent. However, the APR is not the only thing that you will have to check out when you are shopping around for credit. There are many other very important factors that will also effect which credit offers are the best deals. For example, as well as interest, it is possible that a loan will include other fees that do not go into calculating the APR. Some loans, especially mortgages, incorporate arrangement fees or set up fees that you will also have to take into account.
Many other loans will have early termination charges that are added to the bill if you wish to repay the loan early. Flexibility is also a consideration and you may want to check if over payments, or repayment holidays are permitted on your loan. This means that you can put a little extra against the loan when you come into extra money, or take a break from payments if you lose your job for example. This is very important in long term loans such as mortgages. Some credit cards will also offer you low APRs but then charge very high penalties if you miss a payment. Others will offer you low APRs but only for an introductory period, after which the APR jumps to a higher level. You should be aware of these types of offers. Even zero per cent balance transfers can be subject to a balance transfer fee, that in effect means you are paying for the balance transfer, and it makes little difference to you whether it is as interest or as a fee.
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Essentials of Borrowing