Interest Costs of Loans and Credit Cards In Scotland
When reading about interests and costs of loans and credit cards in Scotland, it’s easy to get confused by all the facts and figures flying around concerning the interest costs of personal loans, pay day loans and credit cards. Always read the small print and ask questions about anything you are unsure of before committing to making the application.
Many payday loans companies such as Wonga and Quickquid have either completely disappeared, or gone into administration but many more companies exist that do still charge excessive interest costs of loans, credit cards and ‘rent to own’ schemes offered by the likes of Brighthouse’s owners, Caversham Finance Limited.
You will have heard of APR but what does it really mean?
APR stands for Annual Percentage Rate and means the amount of interest you would pay to the lender if you borrowed the money for one year, expressed as a percentage of the loan.
If you borrowed £500 at 20% interest for one year, you’d pay back £500, plus 20% of £500, (£100), meaning you’d pay back £600 in total.
Another way think about APR is by how many pence it costs you to borrow one pound each year.
If the APR on your loan was 20%, you’d pay back 20p per year for each pound you borrowed.
The APR also includes mandatory administration fees and other charges. It doesn’t include charges such as late payment charges which would be extra on top of the APR.
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Legally, companies have to state their APR, even if your loan term is for less than a year. This makes it easier to compare the rates different companies have. It is also more transparent as the monthly interest rates may look much smaller but in reality, if taking the loan over a year, the APR is not just the monthly rate times 12 as you are paying on the original amount plus interest each month. This type of interest, (compound interest), means that the amount you owe will be more each month as the interest builds.
What does it mean if the if the APR is over 100%?
This means you would be required to pay back more than you originally borrowed.
If you borrowed £500 at 200% APR for one year, you would pay back a total of £1000, which is £2 per year for each pound borrowed.
What are representative rates?
All the advertised APR rates for credit cards and loans are representative rates. This means, only 51% of successful applicants get those rates and the other 49% of people approved for the loan will be charged a higher rate of interest. Unfortunately, the only way to know what rate you will be offered is to apply which impacts on your credit score.
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Remember to read the terms and conditions carefully and make sure you know the interest rates and fees you will be liable for and don’t take out a form of credit if you’re not confident you are able to pay it back.