Prudence favours the modern-minded borrower

Research the options when you are seeking a loan, writes John Andrew. It could spare you a large interest payment
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The Independent Online
The chances are that when you make a large purchase, you shop around for the best deal. When it comes to borrowing money, we are not always so consumer-conscious and will take the most convenient line of credit available. The result is that we could be paying far more for borrowing money than we need to

The chances are that when you make a large purchase, you shop around for the best deal. When it comes to borrowing money, we are not always so consumer-conscious and will take the most convenient line of credit available. The result is that we could be paying far more for borrowing money than we need to.

Take the example of a £500 personal loan over one year. With Yorkshire Bank the monthly repayments are £45.82, while with Clydesdale Bank they are £45.25. You may think there is not much to choose between the two. However, with Yorkshire the total amount repayable is £549.84 against £578.00 at Clydesdale. The £28.16 difference can be partly explained by the interest charged, but is mainly due to Clydesdale's £35 arrangement fee.

Research in the 1990s revealed that two-thirds of the nation had no idea how to spot the best credit deal. Even when contestants in Radio 4's Brain of Britain quiz were asked the meaning of APR, there was a stony silence. It is the Annual Percentage Rate ­ the yardstick to help consumers spot the best credit deal. You will see it emboldened in all advertisements for credit. It incorporates all the costs that have to be paid when borrowing money ­ fees as well as interest. The general rule is, the lower the APR the better the deal.

At Yorkshire the APR for a £500 loan is 19.5 per cent, while for Clydesdale it is 32.6 per cent. To be fair, Clydesdale is more competitive for larger loans. Its APR for a £10,000 loan is 9.9 per cent against Barclayloan Direct's 13.9 per cent. The result is that anyone borrowing this sum from Barclay's over 5 years would be paying £1,133.80 more than a Clydesdale borrower.

The APR is just one factor. As a rough rule of thumb, the total interest charge increases by a multiple of the years of a loan. So if you borrow £500 over one year, you will typically pay around £50 in interest. Extend the period to three years and the total interest charge is £150. Monthly repayments decrease the longer the period of the loan. Borrowing £500 over 12 months results in typical monthly repayments of around £45, falling to around £18 over 36 months. The moral is to borrow over the shortest period you can afford and reduce the total interest payable. Other points to consider:

The yardstick for overdrafts is the Equivalent Annual Rate, or EAR. This only comprises interest; so consider arrangement fees when deciding whether to borrow temporarily by overdraft or credit card.

When comparing APRs for credit cards with an annual fee, make sure the basis of comparison is the same. While most issuers base the APR on a credit limit of £1,000, some use £3,000. This has the effect of lowering the APR.

Some lenders automatically quote repayments inclusive of credit protection insurance. This repays the loan should you die and covers the repayments for 12 months if you are ill or become unemployed.

Looking for credit card or current account deals? Search here

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