Borrowing comes with a lot of percentages, and they are not all measuring the same thing. You might see an interest rate, an APR, a representative APR and a total amount repayable all on one page. It is easy to glance at one number and assume it tells the whole story.
This guide breaks each term down in plain English, so you can read a loan quote with confidence and compare offers fairly. It applies to most types of credit, from credit cards to car finance and logbook loans.
What is an interest rate?
The interest rate is the price of borrowing the money itself. It is shown as a percentage of the amount you borrow, usually over a year. If you borrow £1,000 at a simple annual rate of 10%, you would pay about £100 in interest over a year, before taking into account how the balance falls as you repay.
On its own, though, the interest rate leaves things out. It does not include any fees the lender charges, and it does not reflect how often interest is added to the balance.
What does APR mean?
APR stands for annual percentage rate. It is designed to give you a fuller picture by combining the interest with any compulsory fees you must pay to take out the credit, then showing the result as a yearly rate. It also accounts for when payments are made.
Because every lender has to work APR out in the same standard way, it is a useful starting point for comparing similar products. Two loans with the same interest rate can have different APRs if one charges an arrangement fee and the other does not.
Something to remember: APR is an annual figure. For credit you repay over a short time, it can look very high even when the cash cost is modest, and for long terms it can look low even though you pay interest for longer. That is why it should never be the only number you look at.
Representative APR versus the rate you are offered
When a lender advertises a "representative APR", it means at least 51% of people accepted for that product through that advert get that rate or a lower one. Up to 49% may be offered something higher.
The rate you personally get depends on your circumstances. That is why getting a personalised quote matters. At Logbook Money, a soft search gives you a personalised quote without affecting your credit score, so you can see your own figures before you decide anything. You can also check the representative example on our logbook loan calculator.
The total amount repayable is the number to focus on
If you only look at one figure, make it the total amount repayable. It is the full amount you will have paid back by the end of the agreement, including the money you borrowed, all the interest and any fees.
Here is why it matters. Imagine you are offered two loans for the same amount:
- Loan one has a slightly higher APR but runs for 12 months.
- Loan two has a lower APR but runs for 36 months.
Loan two will have smaller monthly repayments, which can look more attractive. But because you are paying interest for three times as long, the total you hand over could easily be higher. Check both the monthly payment you can afford and the total cost before choosing. Our guide to comparing the cost of borrowing goes into more detail.
Fixed or variable interest?
With a fixed rate, your interest is locked in for the length of the agreement, so your repayments stay the same. That makes budgeting simpler. With a variable rate, the interest can go up or down, often in line with the Bank of England base rate or the lender's own rate, so your repayments might change.
Logbook Money loans have interest fixed when you sign, so you know your repayment amount from the start. You can also settle early at any time and get a rebate on interest.
Questions to ask before you borrow
- What is the total amount repayable, and can I afford every repayment comfortably?
- Are there any fees not included in the headline figures?
- Is the rate fixed or variable?
- Can I pay off early, and what happens to the interest if I do?
It is also worth reading our article on spotting hidden fees in a loan agreement. Remember that secured borrowing, such as a logbook loan, is a costly way to borrow and puts your vehicle at risk. This article is general information, not financial advice. If you are borrowing to cover other debts, speak to a free adviser at MoneyHelper or StepChange first.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
