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.
'Need expert help with money issues?' page for more
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
- 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.
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%.
If you borrow £1,000 for one year at 20% interest, and pay
throughout the year in equal monthly instalments (12 x £100 =
- 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
- Does the interest included in the APR vary, or is the rate
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
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
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.
Check the APR. All lenders have to tell you what theirs is, so you
can compare like with like.
- 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
- 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
information, go to the
Money Advice Service website.