Understanding Your Loan
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Loans can be daunting and complicated, but simply learning the meanings of a few simple terms can allow you to make informed decisions and save money. Understand your loan deal before you commit to anything, and you could save yourself a lot of hassle in the long run.
Loans terms you need to know:
- APR: Annual Percentage Rate. This is the amount of interest you’ll pay over 12 months. If a lender advertises its monthly interest, ask for the APR so that you can compare it to other loans.
- Early redemption fee / settlement penalty: The amount some lenders will ask you to pay if you decide to settle your debt before the end of the loan term. This can be the equivalent of up to two months’ interest.
- Loan term: The length of time you’ll be borrowing the money for. For unsecured loans, this is usually between one and 10 years.
- Credit rating: Lenders will check your credit rating before deciding whether to give you a loan. It’s a measure of how big a risk you represent, so it’s based on how well you’ve managed to repay debts in the past, among other things.
About APRs
Looking at the APR is the best way to start comparing different loans – it’s a good measure of how competitive a loan is, and there’s no reason to pay more interest than you need to.
For unsecured loans in the UK, APRs start at about 5%. You’ll typically get a lower rate with a secured loan as you’ll present less of a risk to the lender this way. Online lenders will usually charge less than high street banks and building societies.
Although the APR is the perfect place to start, you’ll need to look at some other factors before you sign up for a loan. For instance, some lenders won’t allow you to borrow for less than a year. Some will charge a penalty if you pay off the loan early.
How Credit Choices can help you choose a loan
Before you go to a lender, you should be armed with as much information as possible. Credit Choices can help with this – just browse through the loan guides to learn more about loans and use our Loan Calculator to find the best deal.
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