How are loans charged?
A personal loan is a lump sum that you typically borrow from your bank or construction society bank, or through a retailer where you are buying an costly item such as a car or domestic appliance. You agree to pay back the loan over a fixed estimate of months (called the "term") by making set monthly payments. There may or may not be an arrangement fee when you take out the loan, depending upon the lender chosen.
Personal Loans Uk : A Brief Introduction
You can usually pay extra for cost security insurance which pays your monthly payments for you if you are unable to work because of illness or redundancy. Interest is expensed at a fixed rate dependent upon the estimate you borrow. Most lenders will allow you to pay off a personal loan early i.e. Before the end of the term, however there is often a fee equal to part of the interest you would have paid had you kept the loan for its full term.
What is Apr?
What you pay for a personal loan can be expressed as an 'Annual division Rate' or Apr. Apr takes into account:
- the interest on the loan;
- any other charges you must pay eg. Any arrangement fee or the cost of cost security insurance
- the term of the loan.
You do not need to know how to work out an Apr. The important thing is that Apr shows the cost of borrowing on a approved basis so you can collate the Apr of one lender with someone else and promptly see who is the cheaper lender for the same borrowed sum and term. A loan with a lower Apr is cheaper than a loan with a higher Apr. The Apr also lets you collate the cost of personal loans with other types of borrowing such as prestige and store cards. It is important to remember though that Apr does not take into account charges such as an early reimbursement fee if you pay off the loan before the end of its term.
What are loan terms?
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