How are loans charged?
A personal loan is a lump sum that you typically borrow from your bank or building community bank, or through a retailer where you are buying an costly item such as a car or domestic appliance. You agree to pay back the loan over a fixed amount of months (called the "term") by making set monthly payments. There may or may not be an arrangement fee when you take out the loan, depending upon the lender chosen.
Personal Loans Uk : A Brief Introduction
You can ordinarily pay extra for cost protection insurance which pays your monthly payments for you if you are unable to work because of illness or redundancy. Interest is expensed at a fixed rate dependent upon the amount you borrow. Most lenders will allow you to pay off a personal loan early i.e. Before the end of the term, any way there is often a charge equal to part of the interest you would have paid had you kept the loan for its full term.
What is Apr?
What you pay for a personal loan can be expressed as an 'Annual division Rate' or Apr. Apr takes into account:
- the interest on the loan;
- any other charges you must pay eg. Any arrangement fee or the cost of cost protection insurance
- the term of the loan.
You do not need to know how to work out an Apr. The foremost thing is that Apr shows the cost of borrowing on a proper basis so you can correlate the Apr of one lender with an additional one and instantly see who is the economy lender for the same borrowed sum and term. A loan with a lower Apr is economy than a loan with a higher Apr. The Apr also lets you correlate the cost of personal loans with other types of borrowing such as credit and store cards. It is foremost to remember though that Apr does not take into catalogue charges such as an early repayment charge if you pay off the loan before the end of its term.
What are loan terms?
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