Money Matters

The world of credit can be confusing. There are so many ways to gain credit these days, you should be aware of the potential pit-falls and really understand what you are signing up to.

Here is some general information to help you make financial decisions. It is not advice, nor can it take account of your own particular circumstances. For advice with a view to making decisions about your own circumstances you should consult a financial or other professional adviser.

You can also receive expert guidance from a professional money guide free of charge at East Ham Local Service Centre. Visit our 'Need expert help with money issues?' page for more information.


What is APR?

APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. The APR includes important factors such as:

• the interest rate you must pay;
• how you repay the loan; the length of the loan agreement (or term); frequency and timing of instalment payments; and amount of each payment;
• certain fees associated with the loan; and
• premiums for payment protection insurance that the lender chooses to make compulsory.

All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender. Generally, the lower the APR the better the deal for you, so if you are thinking about borrowing, shop around.

Example 1:

If you borrow £1,000 for one year at 20% interest, and at the end of the year you repay a lump sum of £1,200:

• you will be paying an interest rate of 20%; and
• the APR will also be 20%.

Example 2:

If you borrow £1,000 for one year at 20% interest, and pay throughout the year in equal monthly instalments (12 x £100 = £1,200),

• you will still be paying an interest rate of 20%; but
• the APR, however, will be roughly 40%.

Example 2 is more expensive because you are paying back the £1,000 gradually throughout the year. In Example 1 you have the benefit of being able to access the £1,200 for the whole year, which you could invest and earn interest on. By paying in instalments you're losing out; this increases the cost of the loan - hence the higher APR.


Questions to ask the lender

If you find a deal with a low APR, ask the lender the following questions:

• Does the interest included in the APR vary, or is the rate fixed?
  If the rate is variable, your repayments could go up or go down. If the rate is fixed, your repayments will stay the same.
  
  
• Are there any charges that are not included in the APR?
  This could include charges for services such as optional payment protection insurance. If so, make sure you understand:
• • what the charges are;
  • whether you really need the services offered;
  • how much you would have to pay; and
  • When you would have to pay.
    
    
• What are the conditions of the loan or credit and do they suit you?
  For example, do you have a choice about how and where you make the repayments? If you suddenly have spare money, can you pay the loan off early - without penalties?
  
  
• Can you afford the monthly payments?
  A more expensive loan (with a higher APR) could have lower monthly payments if they are spread out over a longer period of time. That might suit you better if your budget is tight, even though you would pay more in the long run.

Top tip

Check the APR. All lenders have to tell you what theirs is, so you can compare like with like.


Definitions

• Annual Percentage Rate - the true yearly rate of interest you are paying on a finance agreement.
• Annual Percentage Yield - the effective, or true, annual rate of return. The A.P.Y. is the rate actually earned or paid in one year, taking into account the affect of compounding.
• Annual rate of return - is the yearly rate of interest charged on the loan, which is a percentage of the loan. If the rate of return is calculated on a monthly basis, you can multiply this by 12 to express an annual rate of return to include the affect of compounding interest.
  

For further information, go to the Money Advice Service website.