Interest Rates and other Borrowing Costs
There are huge differences in the costs of different types of loan. A mortgage for house purchase might be as little as 4% per annum while doorstep credit can be up to 200% per annum. The differences between lenders for the same type of credit can be much bigger than you might think. It always pays to shop around.
Just as important as the rate of interest are the terms and conditions. The small print can contain conditions which will add a lot to the overall cost of the loan - administrative charges, penalties, minimum loan periods, charges for early repayment - even compulsory insurance against redundancy. Always read the small print before you sign up.
First, let's look a bit more closely at interest rates and in particular some of the tricks banks get up to. They are trying to make the deals they are offering look a lot more attractive than they really are.
When you are looking for ways of borrowing money (or saving it for that matter) you come across a whole range of technical terms. They are used by companies to confuse you rather than inform you. You will probably want to throw your hands in the air and say `that's too complicated - I'll take the deal with the lowest rate in the advert.' Don't! That's exactly what they want you to do.
The figure to look for is the APR (annual percentage rate). This figure is an attempt to provide a standardised method of calculating interest charges so that people can compare like with like. Unfortunately it has not turned out quite as simple as that. It recently took a Cambridge mathematician several hours to work out exactly how the APR quoted by a major UK bank had been calculated.
But APR is probably the nearest you will get to finding a way of comparing lenders' rates, so this is the one to look for.
It's not the only rate that you will see quoted though. Many mortgage lenders quote a very low looking rate in large type and then put a different (and higher) APR figure underneath it in smaller print. Ignore anything other than APR.
Base rate is also mentioned. You will often read that a variable rate will be 1 or 2 % above base rate. Base rate is linked to minimum lending rate (MLR). MLR is the minimum rate at which the Bank of England is prepared to lend to other banks. That may not sound as though it matters much to you. It is, though, the basis on which all other rates of interest are charged by banks and building societies. You may be surprised by how much base rate has gone up and down over the years. This is important because in recent years interest rates have been fairly stable and in historical terms, very low. Since 1990, minimum lending rate has ranged between 3.75% and 15 %. You should think hard, therefore, about what would happen to your finances if rates went up to even 6% or 7%.
