You can’t borrow money for free. When you take out a Loan, you’ll be expected to pay back the interest on it too. This applies to all types of loans, including short term loans and payday loans.
But what about those credit cards that offer interest free balance transfers you may ask. It’s true that they don’t charge you interest for a set period, but they do still charge you a transfer fee. This is usually between 1-3.5% of the amount you’re transferring. So yes, you won’t be paying interest on the balance transfer to begin with. But it’ll still cost you something with the fee that’s added to it.
Back to those loans that have interest added to them. Before you take them out, you’ll want to know how much extra it’s going to cost you to borrow the money. The total amount you’ll be paying back will be in your loan agreement. But what if you want to work it out yourself?
Here we’ll look at how to calculate the interest on a loan. But first, we need to make sure we understand the information that lenders give us when choosing loans. That’s because they don’t just tell you the interest rate. Lenders will also tell you the Annual Percentage Rate (APR). What’s the difference? Let’s find out.
What’s the Difference Between the Interest Rate and the APR?
The interest rate on a loan is how much extra you pay back for every £1 you borrow. It’s usually shown as a percentage. For example, if you borrow £100 and the interest rate is 10%, the extra amount you pay back is £10. So, in total you’d pay back £110.
The APR on a loan is higher than the interest rate. This is because the APR relates to the total cost of the borrowing. It includes the fees and charges that are applied when you take out the loan, not just the interest. That’s why the APR is higher.
When you’re comparing lenders, you may have thought that the one with the lowest interest rate is the one to choose. But while their interest rate is lower, you may find that their APR is higher than other lenders. For this reason, it makes sense to look at the APR rates when you’re comparing loans. That way, you’ll know which loan will cost you less to pay back overall.
How Do You Calculate the Interest Rate on Loans?
In order to calculate how much, you’re going to pay in total for your loan, you need to know four things:
- How much you’re going to borrow?
- How long you’re going to borrow the money for (i.e. the loan term)?
- What the interest rate is?
- When the interest is charged (i.e. is it added daily, weekly or monthly)?
As you pay off your loan each month, the loan amount goes down. This means that, on the day that the APR is added, it’s worked out on a lower amount each time. This makes it difficult to calculate exactly how much you’ll end up paying back in total. Unless you’re very good at maths, you’re better off letting the experts do it for you.
Lenders will give you a repayment schedule when you apply with them. They’ll also give you the total amount that you’ll have to pay back. But to get a rough idea of how much your loan will cost before you start applying, look online. There are loan calculators that’ll work out how much your monthly repayments will be. That way you’ll know how much you can afford to borrow before you apply.
In Summary
When you’re looking for a loan, one way to compare which lender to apply with is by looking at their APR. This will give you a true picture of how much extra the loan is going to cost you. Lenders will tell you what you have to repay before you submit your loan application. Otherwise, you can use online loan calculators to get an idea of how much you’ll have to pay back before applying.
Remember, borrowing money always comes at a cost. Make sure you know what that cost is you before you take out a loan. If you can, it’s better to save up for what you want, rather than getting into debt for it.
Disclaimer: We are not providing financial advice and these are just tips for informational purposes.
