How to understand the cost of borrowing

Interest is what you get charged to borrow money on top of repaying back what you borrowed.

For example,  a10% interest rate would mean that for every £100 you borrow, you need to pay back £110 a year i.e. the £100 borrowed and £10 in interest. Your interest rate could be fixed (it will always be the rate you start with for the whole loan), or variable (it could change if the lender decides to change it). It’s a good idea to understand which you’re being charged if you’re borrowing.

What is an APR and how does it work?

Annual Percentage Rate is the overall annual cost - in the form of interest and any other fees-  that you’ll pay to borrow money from a lender. Take a look at the example below - you can see how the headline interest rate is different to the APR in some cases, unless there are no additional fees or charges. The higher the APR, the more you end up paying:

What is a “Representative APR”?

This just means that this is what the average customer will get as an APR when borrowing. The exact APR you get will depend on your credit score and it could be higher or lower than the representative rate..

What are the other fees that could be charged?

Some companies charge an application or arrangement fee - this is the amount that is charged to get the loan set up. Others might have a yearly service charge. Either way these additional charges are included in the APR rate you are quoted.

Why does the APR matter?

It’s the quickest and easiest way to compare the cost of borrowing from different lenders before you commit to one. The lower the APR, the less you’re going to pay for borrowing that money.

Remember, make sure you know what your APR would be, and not just the representative APR. If you look at your credit report, you will be able to get a sense of whether you would get a good APR, or not. A higher credit score usually means a low APR, which means you’ll pay less to borrow money.