It’s crucial to work out the total cost of the credit you’re taking out, including interest payments, and not just the amount you’re borrowing or how much you can afford to pay every month. Taking the time to work out the full cost of any borrowing lets you plan your finances and ensure that you really can afford it.
- What affects your borrowing costs
- Borrowing options
- Calculating the cost of borrowing
- Make sure you keep up with your repayments
- Your tips for borrowing money and paying it back
What affects your borrowing costs
How much you’ll pay to borrow money depends on how much you need and how quickly you plan to repay it.
For example, if you want to borrow a small amount over a short period of time with a low interest rate, you might well pay very little interest (or none at all if you use a credit card charging 0% interest).
On the other hand, borrowing a large amount of money over a long time will cost you more.
In general, use the APR to compare products.
The lower the APR the better, but also look at how much it will cost overall.
This will usually be more for a longer-term loan even if the APR is less, and will show as the total amount payable.
Let’s look at an example. John needs to borrow £1,000 to replace his old boiler.
He gets a quote from a big energy company for the boiler and the installation, including paying back the cost over two years.
However, when he reads the contract he notices that if he takes out their credit for two years he will pay more than £300 in interest.
John looks around at other options.
As he has a good credit rating, he considers:
- taking out a credit card with an introductory interest-free period of 15 months on new purchases, or
- applying for a personal loan with an interest rate of 10% that he can pay back over two years.
This is how much John might have to repay each month and overall:
|Option||Interest rate||Monthly repayment||Total amount repayable|
|Credit card over 15 months||0%||£66.67||£1,000|
|Personal loan over two years||10%||£46.14||£1,107 (£1,000 borrowed + £107 interest)|
|Energy company credit agreement over two years||30%||£55.91||£1,342 (£1,000 borrowed + £342 interest)|
In the end, John takes a look at his monthly budget and decides that he can afford to take out the credit card and pay the extra £10.76 each month to avoid having to pay any interest.
It means he will have paid off the balance in 15 months and he won’t have been charged interest.
John will only save money because he knows he can make the payments within the 15 months.
If you don’t think you would be able to do that, a credit card could cost you more.
What this table shows is the difference in repayment plans over different periods of time and how being able to pay a little more each month might mean you’re able to take out a much cheaper form of credit.
It also highlights the importance of shopping around for credit and not just taking the first product you are offered.
Always spend some time shopping around for credit. Use comparison websites to look at different deals.
Be aware of any extra charges or fees.
All loans should tell you how much you’ll pay back overall, including any interest.
Regular versus flexible payments
A loan agreement will have an amount you have to pay back every month.
It might charge an early repayment fee if you do clear it ahead of time.
Repaying your loan early at any time, in full or part, can be a good way of minimising cost.
- If you took the loan out before 1 February 2011, the most you can be charged is two months’ interest.
- If you took the loan out after 1 February 2011, by law no fee can be charged for early repayment.
That is unless the amount repaid early exceeds £8000. Even then, the amount is capped.
You can ask the lender for a ‘settlement statement’ showing how much you’ill save by repaying early.
Other forms of borrowing such as overdrafts and credit cards are more flexible with low or no minimum repayment.
But the interest rates on these tend to be higher and some overdrafts charge an initial arrangement fee.
Pros of regular repayments
- Repaying a regular fixed amount might help you budget.
- You know exactly when you will have cleared the debt.
- You should be able to repay your loan early with no penalty (or early repayment charge) as long as you overpay less than £8,000 in a year (unless you took it out before 1st February 2011, when a penalty of – typically – two months’ interest might apply).
- Regular payments might make it harder to budget if your income fluctuates.
Calculating the cost of borrowing
You can work out how much it will cost you to borrow if you take out a loan or a credit card using the information that lenders have to give you.
By law, when you apply they must tell you:
- how much you’ll have to repay in total
- how much you’ll have to pay every month
- the interest rates, any fees or charges and the APR.
You should find this information on the credit card or loan company’s website.
It must also be in the pre-contract credit information form (the SECCI).
If it’s not on the website, the firm will need to send it to you before you enter into the agreement and explain key elements of the agreement.
In the case of credit cards, this will be based on certain assumptions about how you’ll use the card.
You can also use an online calculator to work out the true cost of any borrowing – and it will only take a few minutes.
Make sure you keep up with your repayments
If you miss any repayments you could be hit by fees and additional charges.
It could also harm your credit rating because lenders look at how you’ve managed your existing credit when working out whether or not to lend you money.
Make sure there is enough money in your bank/building society account each month to cover your repayments and set up a regular standing order (for a fixed amount) or Direct Debit (if the payments vary) so you don’t miss a payment.
Your tips for borrowing money and paying it back
This article is provided by the Money Advice Service.
Some important information about Rest Less Money
We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.
When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.
Key things to remember when using Rest Less Money:
We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.
No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.
Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.
A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested.