A loan quote can include several percentages and pound figures, each measuring a different part of the cost. Understanding how they relate to each other is one of the most useful skills a borrower can have, because the most attractive headline figure does not always belong to the least expensive loan.
In this article, V5 Solutions explains the key terms and then works through an example comparison, so you can see how the numbers behave in practice.
The Four Figures on a Loan Quote
Annual interest rate
This is the charge for borrowing, expressed as a percentage of the balance per year. It covers interest only. Fees, and the effect of how frequently interest is calculated, sit outside it.
APR (annual percentage rate)
APR is a standardised measure that rolls the interest together with any mandatory charges for taking out the credit and expresses the combined cost as a yearly percentage. Lenders must calculate it using the same method, which is what makes it helpful when you are lining up similar products side by side.
Representative APR
Adverts usually show a representative APR. Under UK rules, at least 51% of the customers who take out the product as a result of the advert must receive that APR or better. The remainder can be offered a higher rate, depending on the lender's assessment of their circumstances.
Total amount repayable
This is the sum of everything you will pay over the agreement: the amount borrowed, the interest and any fees. It turns the percentages into pounds, which is far easier to weigh against your budget.
A Worked Example: Comparing Two Loans
Suppose Sam needs to borrow £3,000 and has two quotes. The figures below are made up purely to illustrate how the measures interact.
- Quote A: a higher APR, repaid over 18 months.
- Quote B: a noticeably lower APR, repaid over 48 months.
At first sight, Quote B looks better. Its APR is lower and the monthly payment is smaller. When Sam checks the total amount repayable, however, Quote B comes out higher, because interest is charged on the outstanding balance for an extra two and a half years.
The lesson is that APR describes the rate of cost, not the total cost. A longer term can make a lower rate more expensive overall. The right choice depends on what Sam can afford each month without strain, balanced against how much the loan costs in total.
Why Is APR Sometimes Misleading?
Because APR is annualised, it behaves oddly at the extremes. Very short-term credit can show a startlingly high APR even if the pound cost is fairly small, while a long agreement can show a modest APR with a large total cost. APR is best used to compare products of a similar size and length. For anything else, the total amount repayable gives a clearer picture.
Fixed Versus Variable Rates
A fixed rate stays the same throughout the agreement, so each repayment is predictable. A variable rate can move during the term, usually moving with changes to the base rate set by the Bank of England, or with a rate the lender sets itself, which means repayments could rise.
V5 Solutions logbook loans have interest that is fixed when you sign. Repayments are made weekly or monthly by recurring debit card payment, and you can settle early at any time with a rebate on interest. A personalised quote shows your own figures; it uses a soft search and does not affect your credit score. Our logbook loans page explains how this works and shows our representative example.
Checking the Cost Before You Commit
Before signing any credit agreement, it is worth confirming the following:
- The total amount repayable, and whether every repayment fits your budget.
- Whether the rate is fixed for the whole term.
- Any charges for late or missed payments.
- How early settlement works and how much interest you would save.
Our guide to hidden fees in loans covers the charges that are easy to overlook. Keep in mind that a loan secured on your vehicle is an expensive form of credit, and your vehicle is at risk if you fall behind. This article is general information, not financial advice. If you are struggling with existing debts, free advice is available from National Debtline and Citizens Advice.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
