Most people will want to borrow money at some point in their life. Whether you are buying a house, financing a business, buying an expensive item such as a car or paying for emergencies, the process is essentially the same - a company lends you money, you pay it back over time, they make a charge for the loan.
Understanding APR
Like any other product, some deals will be good value for money and others will be less so. It always pays to shop around and compare the various products on the market.
One good way to compare two like products is to look at the APR (Annual Percentage Rate of charge). This is a measure of how much interest is charged over time on the loan. More specifically, the APR is the amount of interest you would pay on a given amount of money (expressed as a percentage of the total loan per year).
The amount of money you might pay for a loan may not always be expressed as an APR (some credit cards, for example, express their interest charges as a monthly rate). Always be sure you know what the APR is, and have any other measures of cost converted to an APR. All lenders have to tell you what the APR on a loan is, before you sign any agreement.
Check to see whether the APR is fixed or variable. A variable rate may mean your actual charges will go up or down over time, generally as base interest rates change. A fixed rate means that the interest charge rate will stay the same, though with some types of loan this may mean that the rate is slightly higher than a variable rate loan.
Other charges may include optional payment protection insurance and charges for early repayment of loans (this penalty is designed to compensate the lender for loss of interest-earnings if you pay off a loan early).
There are many ways to borrow money and the most appropriate way of borrowing will vary depending on how you intend to use the money. You wouldn't expect to buy a car with your credit card, for example.
The Office of Fair Trading has a handy calculator at http://www.oft.gov.uk that will help you work out how much borrowing at various interest rates will cost you. The Financial Services Authority has a guide to comparing the various ways of borrowing money at http://www.fsa.gov.uk.
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