Interest Rates Explained

It’s probably the key factor in deciding whether to take out a loan or not. Namely, the interest you have to pay on top of what you borrow. After all, the higher the rate, the less sense borrowing makes. What’s more, it makes repayments harder the more you have to pay each month. Rates can confuse many a prospective borrower, especially rates for short-term loans where the rate refers to a period longer than the loan itself. Moolr took a look at what is involved – interest rates explained.

Interest and APR explained

Interest is the fee that you are charged when you borrow money. It is usually a percentage of the whole amount that you borrow. Usually, interest is displayed as an “Annual Percentage Rate” (APR).

APR means, in short, how much your loan will cost you over the course of a year. It takes into account what your interest rate is and also how often you pay interest, pkus what fees are associated with the loan.

All lenders are required by law to display their APR on their products. This allows customers to make a fair comparison and weigh up all their options.

How interest rates can differ

Interest rates will vary based on a number of factors. An important one is what your individual credit score is like. Typically you may be charged higher interest if you have a poor credit score. This is because the lender consider themselves to be taking more of a risk by lending to you. They base lending on trust. Trust that you will make full repayments.

The type of lending is also highly relevant. A credit card, for example, may have a different interest rate to a loan or an overdraft. This will vary from lender to lender. What’s more, the rate of interest will vary according to how much you borrow and how long for. A small short term loan is likely to have a higher interest rate to a loan repaid over a longer amount of time.

There are lots of things which contribute to the final interest amount, and it is important to always be aware of interest rates when taking out a loan.

Personal and representative APR

There are two sorts of APR – Personal and Representative. Representative APR is shown on advertisements. This is the APR that the majority of customers who see the advertisements must be offered. Personal APR is what your individual APR will be over the year. In most circumstances, it may be the same as the Representative APR, but not necessarily.