The Ultimate Personal Loan Guide Part 2, Chapter One - Personal Loans Interest Rates

Are interest rates really as they are advertised? How does interest rate affect your loan? Personal Loans Now offer you an honest explanation and critical information to ensure you get the best deal possible.

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Learning Highlights
  • What is compound interest?
  • Learn about APR on personal loans
  • Monthly interest rates and representative APR on personal loans
  • Rates On Car Finance Loans
  • Interest rates and missed payments on personal loans
  • Information about PPI on personal loans

Best Interest Rates – How Is The Interest Rate Calculated On Personal Loans?

What Is Compound Interest Rates?

When you borrow a sum of money over a set period through a personal loan, the lender charges you interest on the amount borrowed.

Here is a simple example: If you borrow £1,000 for a year at a rate of 10%, you pay back £1,100 as required.

The majority of personal loans are for longer periods and lenders compound the interest. That is, you pay interest on any interest that has been added to the loan. If this sounds complicated, don’t worry. Interest rates for personal loans are all advertised with an Annual Percentage Rate. This is a requirement for all lender.

APR Interest Rates On Personal Loans

The FCA regulations obligate all lenders to advertise personal loans using the APR, that is the Annual Percentage Rate. This rate includes the total cost of borrowing and any setup fees or other charges that the loan involves. A setup fee mainly applies when you take out a loan through a third party (broker). Lenders might also include clauses that demand extra interest if you wish to repay the loan early.

Interest rate - Personal Loans Now

Using the APR to compare offers on best personal loan rates is the only way you can be sure of getting the best deal. Every lender must tell you exactly what the APR is on a loan before you sign the contract. Also, the APR must be highlighted and very visible on the loan agreement.

Personal Loans Low-Interest Rates – Monthly Interest Rates

Some credit card lenders advertise monthly interest rates which make the charges sound lower than they really are. If you see an advert for 2% monthly interest, you will actually be paying 27% APR. If you want to look at the a compound interest rate on a loan, there are a number of online calculators available. Here you can enter details to work out the rate you would be paying.

Details needed are the amount borrowed, the annual interest rate, the term of the loan, the total amount repayable and the amount of interest that is repayable. These are all the details that the lednder should provide when you apply for a personal loan. Unlike interest on savings, there is no tax on loan interest. You just pay back what you have borrowed plus the interest charged.

Interest rate - Personal Loans Now

Interest Rates And Terms For Personal Loans

The longer the term you choose for your borrowing, the more interest you will pay. Also, if you fail to make repayments or make late payments, the repayment for the loan includes the extra interest. Consequently, you will pay even more interest on this extra amount. This can make the term of the loan longer and much more expensive.

To avoid too many costs and to ensure you have the funds to repay the amount you planned, it is important not to overborrow. Always make sure that you can afford the amount you are borrowing and that you will not struggle to keep up with monthly repayments.

Consider other options if you are unable to find a good interest rate on a personal loan.

Fixed Or Variable Interest rates On Personal Loans

Lenders mostly arrange best personal loans at a fixed interest rate. You, therefore, know exactly how much needs to be repaid each month and this figure remains static. There are some banks which offer variable rate personal loans. However, the main loans offered with variable rates, are secured loans on property or other assets.

Interest rate - Personal Loans Now

Higher Interest Rate Than The Representative APR?

Lenders may well advertise low rates for personal loans, but in reality, offer you a higher rate of interest. This is because the banks and other financial institutions are trying to get more business.

A representative APR is the figure you may see. Under financial regulations, lenders must offer this rate to 51% of the customers who apply for, and lenders grant a personal loan. However, lenders reserve the best rates for people with the best credit ratings. If you do not have a high credit score, lenders might offer you a personal loan with a higher rate of interest.

If your credit rating is too low, you may well get rejected for a personal loan especially if the lender has to meet the representative APR targets. Lenders consider some applicants too much of a risk and the lender calculates what the risk is by accessing and consulting credit records.

Finance Car Loan Interest Rates

One of the ways that car dealers try to attract business is to advertise car loans at a flat interest rate.

Interest rate - Personal Loans Now

Although this practice is now becoming less common, you may see advertised a low flat rate of interest. This will actually cost you more than you think over the period of the loan.

Furthermore, flat rate interest is charged on the full amount of a loan for the whole term. So, instead of the balance reducing and the subsequent interest being lower each year, lenders charge you interest on the original amount borrowed until the end of the term.

Note: a 6% flat rate is equivalent to 12% APR.

Fortunately, all loan agreement must now display the APR and if that figure is not there then the contract is not legal.

Interest Rates UK And Missed Payments On Personal Loans

Lenders have no remit to increase the rate of interest if you have missed a payment. But, remember that interest is charged on the balance. You will end up paying more at the end of the term if you have missed one or more monthly payments. Missed payments result in a higher balance for the term of the loan and lenders charge interest on this higher amount.

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Payment Protection Insurance and UK Interest Rates For Personal Loans

In the not too distant past, many lenders mis-sold PPI. It was either by adding it to the loan without telling the customer or by selling the insurance product to those who did not need it. e.g. the unemployed, people on sickness benefits and the retired.

Do not be tempted to buy PPI just because they offer you a lower rate of interest. Consequently, the amount you will pay over the term of the loan will be extremely high. Lenders add the cost of the insurance onto the loan so that you pay extra interest on the lump sum premium. It is much better to purchase PPI from an independent source, usually an insurance broker, who will be able to get you a better deal.

No lender is entitled to demand that you buy PPI as a condition of getting a personal loan.

Interest rate - Personal Loans Now

At this point, it is also worth pointing out that if you were mis-sold PPI on a previous loan, it is still not too late to get the premiums returned along with the interest they charged you. However, do not use one of the many middlemen to make your claim as you will have to pay their fees.

Information about redress for mis-sold PPI is available on the website of the Financial Ombudsman. All reputable lenders carry information about how to make a retrospective claim.

Summary: Current Interest Rates

In this article, Personal Loans Now helps you understand personal loan interest rates by looking at compound interest and APR. Compound interest is added to personal loans. APR is used to compare rates for personal loans. Furthermore, we compared monthly interest rates versus APR and that usually, lenders offer higher rates than the representative APR. We also looked at the effect on interest rates for missed repayments. Finally, we discussed the Payment Protection Insurance and personal loans.

Interest Rate - personal loans now