Given the choice, would you rather, a) sit down and get stuck into a copy of Heat/FHM magazine, OR b) settle down with a book explaining everything you need to know about managing your personal finances?
Hmm. Well, admittedly, reading about personal finance isn’t exactly as fun as wondering why Colleen Rooney is still holding hands with Wayne, but understanding finance is key to getting on top of it. New research from uSwitch.com, shows that almost 71 per cent of us, say that a lack of basic personal financial understanding is to blame for debt.
So with the level of personal debt in the UK now exceeding £1.5 trillion,[1] understanding not only how credit works, but how much it costs, is the first step to sensible borrowing.
I need to borrow money. But what is APR?
In very simple terms, when you borrow money – you have to pay for the privilege! You can tell how much you will be paying for taking out a loan or credit card, by looking at the Annual Percentage Rate (APR).
So the annual percentage rate is how much you will pay for your loan every year.
Supposing you borrow 2,000 at an APR rate of 10% over 36 months, it will cost you 323.24 in total. As you continue to pay every month, you pay more and more of the original amount down, so every time the debt gets lower, the 10% will also be less.
(A very easy to use calculator to work out the real cost of your borrowing can be found here.
http://www.moneymadeclear.org.uk/tools/loan_calculator.html
It’s important to remember though, that when you are considering a loan, the advertised APR is only a guide – what you actually pay can be very different, and it may not include additional charges you may incur such as early repayment charges for loans and late payment charges for cards.
Why is it all so confusing?
Apart from the horrible maths involved in working out APR, loan and credit card providers can confound their customers with complicated rules about the rates.
Credit cards, for example, have what’s known as Multiple APR’s. This means that they charge different interest rates for purchases, cash advance, balances transfers and other types of transaction.
Card issuers may also give you tiered APRS so that, for example the first £400 of your balance may have one rate, and the next £400 have another rate.
And while some cards offer a 0% introductory APR rate, you still need to check what the APR goes up to after that time.
Loan providers too, might offer you a variable APR. This means the rate may go up or down. So always check if your loan has a non-variable APR to make sure that your payments will remain the same
You also need to check which fees are included in the APR, such as admin fees, or introduction fees. This could cover charges for optional payment protection insurance, default charges (for missing a payment or being late or going over your credit limit), and certain other charges such as balance transfer fees.
Choosing a loan…
To make a good decision, you need a true comparison by focusing on the amount you repay by checking the APR, and how long you are paying it for. Normally, the shorter the loan, the more you will end up paying, (eg, payday loans) so if you can’t afford high monthly repayments, aim to spread your loan over a longer period of time. However, bear in mind this will cost you more in interest payments in the long run.
[1] www.walletpop. 30th September 2010
