Understanding Interest Rates

When you borrow money, you make payments towards what you have borrowed and this payment usually includes the interest that the lender charges for lending you the money. The amount of interest can vary, as can the terminology used to describe it but understanding what it means in real money terms is an important part of borrowing.

Basics of interest rates

If you borrow money at an interest rate of 5% a year, it will mean you will pay the amount due plus 5% – so if you borrow £100, you will need to pay back £105 to clear the debt. Interest rates are quoted annually but some lenders give it in different forms.

Similarly, if you save money and the bank account states that they will pay you a set amount of interest on the money you saved, you will gain that amount each year. So, a 1% saving rate where you saved £100 would gain you an extra £1 each year.

Annual Percentage Rate

In most cases, borrowing money will quote the interest rate as an annual percentage rate or APR. This figure is worked out include the interest charged for the borrowing as well as any fees that the lender is including. APR figures can be a bit confusing – for example, an interest rate can be 14% per year but the APR is 17% as this takes into account the fact that charges account for an additional 3% a year.

Sometimes, borrowers will give a figure on a monthly APR as this figure sounds smaller than the annual figure but can add up. So, a monthly APR of 2% equated to an annual figure of 27% including those fees as above.

Things to watch for with APR

APR is stated when you take a loan or a credit card but this figure can change during the life of the repayment. Mortgages are the classic example of this – you can take a fixed rate for a set period of time but once this ends, the rate becomes variable and the amount of interest charge can change on a monthly basis.

Another thing to watch for with APR is called representative APR. This means that 51 out of every 100 people who apply for the product will get the advertised APR but the rest might get a different figure. So, while the representative APR might be 19.9%, if you fall into the 49% of applicants, the APR you are charged might be higher. This doesn’t tend to apply to personal loans, where a single APR figure is quoted.

Annual Equivalent Rate

The other term to discuss interest rates is the Annual Equivalent Rate or AER. This is used for savings accounts and is a way to see the differences between accounts. It gives you an idea of what interest you would be paid if you put the money in the account and left it there for a full year. Alternatively, a figure would be a gross rate, the amount of interest that is actually paid.

There’s a great ‘real life’ example in this short video that should help explain further…



Why You Should Check Your Credit Score

Your credit score, also known as a credit rating, might seem like something you only need to check if you want to get a loan or a mortgage but there are other reasons why you should check your credit score on a regular basis. The process is simple to do and can spot several problems before they escalate.

A full overview of your record

Whether you are borrowing or not, having a full overview of your own credit record is a good idea. It can include a range of accounts such as utility bills, mobile phone bills and shopping catalogues as well as the traditional bank loans, mortgages, and credit cards. It can allow you to see what you owe if you need this information for any reason without checking various statements and websites.

Understand what your credit record means

Your credit score impacts more than just how much you can borrow. It may affect whether you are able to get a certain job. For example, as well as verifying your right to work, or carrying out a Disclosure & Barring Service check, potential employer may carry out a credit check before you’re offered a position. If you have a poor credit record or having problems showing on it, some employers may decide against employing you.

Improve your credit rating

By knowing what your rating is now and what any problems are on it, you can begin to plan for the future. Say you want to buy a new car next year or want to move house in two years’ time. By understanding the bad points on your credit rating, you can see what you need to do to improve it and therefore increase the chance you get the best loans or mortgage rates. There are lots of good ways to improve your credit rating but you need to understand what it is currently before you start.

Spot identity theft

More and more people are experiencing the unpleasant situation of having their identity stolen online – often in the form of credit cards or debts taken out that they know nothing about. Monitoring your credit rating can help you spot something that you haven’t applied for and stopping the process before it gets too out of hand. This step is recommended by the Home Office and means you can contact the bank, lender or provider to report the theft immediately.

Correct mistakes

Lenders sometimes make mistakes, allocated a balance to a cleared account or putting a debt to the wrong person’s details. By studying your credit rating, you will spot these mistakes and have them corrected before they affect your borrowing or your chances of getting the job you want.


There are a number of easy ways to check your credit rating so it doesn’t need to be expensive or difficult. It is definitely worth doing to spot those problems and also to help understand your own position to plan for the future. And spotting identity theft is best done as soon as possible to stop those thieves causing you real problems.

The Most Expensive Ways to Borrow

There’s no right and wrong way to borrow money, rather it is all about what works for you and your finances. But there are ways that are more expensive than others. Sometimes these options might suit your needs better than a less expensive option. But whatever the case, you should always full understand what it is going to cost you to borrow the money and what the repayment terms are. Here we look at the different options from most to lease expensive.

PayDay loans

PayDay loans are a relatively new option for borrowing and have been somewhat demonised. However, it is true that they serve a purpose and if you use a good quality lender, you should get all the information upfront to make an informed decision. APR rates are sky high but you don’t take this kind of loan for a year – usually for a month or less.

Bad Credit loans

Bad credit loans are an option for people with a poor credit rating who need to borrow money for one reason or another. They can be offered over varying terms and will have a higher rate of interest than a normal loan because you have a poor credit rating. But if you can afford the payments, then it can be a way to start rebuilding your credit rating.

Guarantor Loans

Guarantor loans are a revamped version of an old idea – you borrow money and someone with a better credit score stands as guarantor. This means that if you don’t make the payments, the lender will turn to the guarantor and they will need to pay the payment instead. It is seen as an option for people with poor credit or for people just starting out on their financial journey.

Bad Credit Credit Cards

Like bad credit loans, bad credit credit cards offer a card to people who won’t get a normal credit card due to a poor history or rating. They have a higher rate of interest than a normal credit card but can be a good way to rebuild your credit history, as long as you can afford the repayments.

Credit Cards

Credit cards offer a wide range of interest rates with many giving a 0% interest rate as an introductory offer. If you can clear the debt before the period runs out, you won’t pay any interest. But make sure you can afford the payments if you don’t clear it in time and the interest starts to accumulate.

Finance Agreements

Finance agreements such as hire purchase normally have a good interest rate and you can even find ones that offer zero interest for a set period. Like a credit card, make sure you can afford the payments once the low interest rate period ends in case you can’t clear the balance.


Overdrafts from a bank or building society tend to have a low rate of interest but can be high on charges if you exceed it. It can be a good short-term source of extra funds but beware of those charges.


Loans are one of the most cost effective ways to borrow but the best interest rates aren’t always offered to everyone. These include bank loans and those from loan providers as well as secured loans where you borrow against your home.  In this situation, if you don’t pay back the loan, your home may be repossessed.


Re-mortgaging your house is probably the cheapest way to borrow money but remember, that small interest rate will be collected over 25 plus years. Also, if you fail to pay the payments, you can lose your home.

0% deals

0% interest deals are the best as you don’t pay anything for the borrowing. But beware the situation when the zero interest ends and ensure you can afford the payments if you haven’t cleared the balance by this time – some companies add the interest for the period of 0% on once this ends if you haven’t cleared the balance too.

Avoid Credit Hangovers This Holiday Season

Christmas is expensive, especially if you have kids and there is always the pressure to grab those seasonal bargains around Black Friday and other special events. But it is easy to fall into the trap of ‘buy now, pay later’ and if you don’t manage your credit well, you can end up with a serious credit hangover come New Year. Here are some tips to help you avoid that headache in January.

Understand interest rates

Lenders will always do what they can to make their products look attractive so deals such as 0% interest or no interest if you pay within a certain time can seem enticing. And grabbing these deals can be excellent if you know that you can pay off the amount within the period but if there is any doubt, think long and hard. Look at what you will pay after the zero interest period and what it will cost you in money terms – can you afford this? If not, then don’t give into the temptation.

Don’t get caught up

In the same way as special offers, credit card companies will often offer an increase in credit limits around Christmas time. They want to help their customers at a time of year when they know they will be spending more than normal. But remember that this sparkling increase will have to be paid for – either in full when the bill comes in to avoid interest or as a higher monthly payment. Look at the worst case – if you spend all of the increase, what will the payment be? Can you afford this?

Be selective with bargains

The trend of huge deals on Black Friday and in the lead up to Christmas often seem to offer amazing deals that we can’t miss out on. But take a long, hard look before grabbing that bargain. Do you really need that new TV or is the one you have only 12 months old and doing the job perfectly? Do the kids really need the newest PlayStation console or are they happy with what they have? A deal is only brilliant if it offers something you need – and something you can afford!

Know your credit rating

If you are planning to take some credit over Christmas to help with the costs, then make sure you know your credit rating and understand what this mean. You can check your credit score easily online and this will tell you if you have any problem debts that might stop you getting the credit you want. You can get a free credit check from Experian and others that will give you a clear picture of your financial position to make informed decisions.


You can bag a real bargain around Christmas as some items that aren’t popular are at discounted prices while other popular items are priced to tempt people. But remember that everything you buy has to be paid for at some stage and make sure you don’t over commit and find yourself in financial problems come January.