One of the reasons that we launched onto the market was that we always felt that the deck was stacked against the borrower. Complicated terms and conditions, opaque fees, hidden charges, and interest rates which never seemed to be the ones that were advertised on the website. The Loan Broker team are very clear about who should be in charge of the borrowing process – and that’s you, the borrower.
One area which keeps catching out many borrowers is the interest rate on their loans. How come it seems that you apply for a loan with one interest rate and sometimes end up with something else? Part of that is to do with the law and the rules which lenders and brokers must follow when they advertise their services.
In this article, we explain what interest is, what interest rates are, the definition of APR, and using a broker like Loan Broker to get the right deal for you.
Interest – a beginner’s guide
Interest is the charge that a borrower has to pay a lender for access to the money they’re taken out in the form of a loan. The reasons that lenders charge interest are to:
- cover their overheads (wages, office costs, rent, business rates, and other fees)
- make a profit
- pay for any loans where the borrower defaults and the lender loses money.
Understanding an interest rate
Interest has to pay for a lot – as you can see.
And it’s mainly the third reason behind why interest rates can vary so much. Interest rates are expressed in percentage terms like 9.9%, 20%, and 279%. The higher the interest rate, the more you’ll pay for your loan.
People with good credit histories generally pay much lower interest rates on their loans than people with credit histories which aren’t perfect. The reason for this is that more people will end up not paying their loans back. The extra interest charged to borrowers reflects the fact that they have to collect more money from those borrowers to pay for those who default on their loans.
APR – definition
Annual Percentage Rate, or APR, is way of working out the exact interest rate on a loan that you see on a website of a lender of a broker. The APR informs you what percentage of the amount you borrowed will be paid back in interest over the course of a twelve month period.
The APR was devised by the government as a way to make it easier for borrowers to compare the cost of loans. The thinking behind the approach was that, if everyone uses the same method of calculating APR, comparisons between interest rates would be a lot fairer and more transparent.
The APR calculation also includes costs you might incur which aren’t linked to the interest rate – additional fees, application fees, default fees, and so on. Always make sure you check with any lender or broker for hidden fees.
Your loan repayment – what’s it made up of?
When you make repayments to your lender, your repayment consists of two different parts – the interest and the principal. The principal is the amount of money you asked for when making your loan application – for example, £100, £300, or £500.
Loan repayments are “amortised”. This is quite a tricky concept to get your head around so please bear with us when we try to explain it. Even though, in most cases, the amount of money you pay back to your lender each month will be for the same amount, interest will make up a bigger proportion of that payment earlier on during your repayment schedule than later on. If you have a mortgage, it works in exactly the same way.
That’s why, if you swap mortgage provider every two or three years, the amount left on your mortgage doesn’t seem to go down that much.
The reason that loans are amortised is, in the case of mortgage companies, because it’s quite lucrative to have someone take out a mortgage for 2-3 years and then to transfer away. For personal loan companies, the reason is that, if someone offers to repay their loan earlier than expected, they will also make more money from it.
Payday loan companies and short term loan companies levy something called “simple interest” on a daily basis meaning that their loans are “amortised”. If you pay off your payday loan or short term loan earlier, then you can make some real savings.
Representative rate and the advertised rate
You might have heard of something called “representative APR” – this is the rate that at least 51 in every 100 borrowers pay for their loan to a particular lender. You may be offered a cheaper rate than the representative APR, the representative APR itself, or a more expensive rate.
By law, lenders (and brokers) must advertise their representative APR to give borrowers a better chance of understanding the likely cost of any finance they take out.
Our advice on all matters concerning interest is to pay attention to any firm offer made to you and to treat the representative APR as a guidance tool only.
Finding a loan with the cheapest interest rate
In what can be quite a confusing sector, you should consider letting Loan Broker do the work for you. Loan Broker, as our name suggests, is not a lender – we’re a broker. Our job is to connect the right borrowers with the right lenders so that you get the very cheapest loan and our lending partners get just the type of customer they’ve told us that they’re looking for.
All you need to do to partner with Loan Broker is to fill in our application form. We’ll send your details in complete confidence to the lenders we think you’ve got the best match with together with a copy of your credit report. Within seconds, we should start to receive offers and our super-fast computer system will sort through them all to present you with the very best deal we’ve found. Our service is completely free and there’s no obligation to accept any deal we find you.
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