The truth about bankruptcy
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Find out what you’ll need to pay back when you’ve borrowed on a credit card or a loan.
When you borrow money on a credit card or by taking out a loan, there can be a lot of things to get your head around. How much will you have to pay back and when will you need to pay it by? If you didn’t read everything clearly when you applied, you might now be confused about what you owe.
For example, do you know what APR stands for or what this means for your borrowing? Let’s take a look at what you need to know about interest rates and charges, and what you can do if they’re too high to afford.
Interest and charges
APR stands for the Annual Percentage Rate. When you take out any form of credit, the APR is the interest rate plus any fees or charges. This means it’s a clearer picture of the total cost of the debt than just the interest rate.
It’s more helpful to use APR when you’re comparing two different credit products. If you only used the interest rate, this wouldn’t show which product had more or higher charges.
The APR will also show the amount you’ll pay back if you borrowed over a year. That’s why when you look at the APR for short-term, high-cost loans like payday loans, it’s not quite as helpful.
Say you borrowed a £200 payday loan with an APR of 1,500%, for example. The APR wouldn’t be how much you’d actually pay back, because you usually only take out payday loans for a few weeks. Instead, it might be more useful to look at a representative example, which would show exactly how much you’d repay over the term of the loan.
The APR of a loan or credit card is usually ‘representative’. This means that a minimum of 51% of applicants who are accepted must get this rate. The rest could instead get a higher APR – this could happen to you if you’ve had problems with your credit history in the past.
Can you borrow for less?
As we explained, you can use the APR of your loan or credit card to work out how much it costs you in total. You can also use this APR to compare it to other forms of borrowing and work out if there could be a cheaper way to borrow.
For example, if you’ve bought some furniture and white goods on a store card, this could be quite an expensive way to repay what you borrowed. Depending on your credit history, there might be a cheaper way to repay this, like a balance transfer credit card or a consolidation loan. But if you’ve had problems with credit in the past – missed payments or a CCJ – it’s possible that you won’t get accepted for credit with lower APRs.
What’s your debt costing you?
If you’ve borrowed at a high APR, that might be a contributing factor if you are finding that your debt repayments are unaffordable. Take a look at your household budget and see how much you’ve got coming in each month and how much you’ve got going out on bills. Once you’ve done this, look at how much you have leftover. Does it cover the amount that you need to repay each month? If it doesn’t and it’s not even close, it might be worth looking at getting some extra help with your debts.
You can get advice about how to cope with your debts including the different debt solutions available from the Money Advice Service, or by speaking to one of our trained debt advisors. Scroll down to see the options you have to get in touch with us today.
by Emily BancroftBack to blog home