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Interest is the cost of borrowing money. When you apply for credit, you will usually be charged interest.
This is typically expressed as an Annual Percentage Rate (APR), and it dictates how much your loan will cost you on an annual basis.
When you take out a loan, your interest rate is determined by a number of factors.
One is the bank rate. This is the national interest rate set by the bank of England and influences the cost of borrowing money for a lending provider.
The interest rate that you pay is dependent upon the strength of your Credit Profile.
When you apply for a loan, lenders will examine your credit profile to determine how likely you are to repay your loan.
If your Credit Score is excellent, you’ll likely be offered a lower interest rate as you are considered less of a risk.
If you have a bad credit score, you will typically be offered a higher interest rate, as lenders believe you are less likely to repay the loan.
Your interest rate can have a big impact on your loan repayments. Here’s an example of how interest rates can affect the cost of your loan.
John wants car finance for a £12,000 Vauxhall Insignia.
John has had some credit problems in the past and has received a CCJ in the past year. As a result, his credit rating is poor.
Peter is also looking for car finance for a £12,000 Kia Sportage.
Unlike John, Peter has a strong credit history and an excellent credit rating.
Both John and Peter are approved for the loan, but John’s APR is 20.5% whilst Peter’s APR is 6.4%.
So over a 48-month contract, John will pay £5,159.80 in interest and his total amount payable is £17,159.80.
However, Peter will only pay £1,585.45 in interest, with a total amount payable of £13,585.45.
Interest rates can vary among different finance providers, so it’s a good idea to shop around and compare your offers before you make a decision.
But be careful, with several different types of interest rates available, it’s important to compare like for like. Otherwise, you may be paying more interest than you think.
For example, with APR the amount of interest you pay each year is adjusted to reflect the outstanding finance.
However, a Flat Rate is calculated based on the original amount borrowed.
This means your interest cost remains the same each year, regardless of how much you have repaid.
To check you’re comparing like for like, you can always refer to your SECCI Document.
This is a standardised form provided by finance companies, that helps you to compare your loan offers clearly.
All regulated credit providers are required by law to provide you with a SECCI form.
To get the best rate, you may need to shop around. However, if you’d prefer someone else to do the hard work for you, Creditplus can help.
With a vast panel of high street lenders and over 90 lending options, we’re confident we can find you the best possible deal.
Simply complete our 2 minute no-obligation Application Form and a customer consultant will be in touch.
Check your eligibility today without affecting your credit score and receive an instant decision.