How is APR on a loan calculated?

Milky_Mocha

Hi

I've been approved in principle for a £15,000 loan over 48 months at 6.97%. I'm trying to figure out how much interest I'd be paying each year. Is it just a case of that percentage times the 15k? That would equate to £1,045 each year in interest. I'm thinking that maybe the calculation is not that simple?? Its an unsecured personal loan.

I'm considering the alternative of a balance transfer of 15k to my current account. This incurs a one off fee of £525 and according to my credit card company I have a 0% interest rate till June 2013. If this works out more cost effective I could pay off aproximately half by June and then pay off the balance with savings or work bonus.

Please advise or give any opinions.

Thanks

R_P_W

Has the lender not given you a break down of payments?

Milky_Mocha

Hi
It was only approved in principle and it was over the phone with freedom finance. At that point I thought the rate Was high so I told them I wasn't interested. I called back and they said they would have to take me through the application again. As its a general query I was hoping to understand the options before going through the whole process again with another search etc. However if there is no standard way of calculating this interest and payment can vary even if the interest is a given rate then I guess id have to wait till Monday, phone them up and go through the whole process again.

YorkshireBoy

It's not really necesssary to know how they work out the APR (although if you search the BBA website you'll be able to find out). What's more important is the cost over your chosen repayment term.

For example, according to http://www.whatsthecost.com/loan.aspx you'll be paying around £930 interest in the first year. Compare this with the £525 SBT fee on your credit card and you'll see it's about twice as much as the credit card cost.

Hardly surprising really, since the SBT cost is 3.5% (525/15000*100) and the loan cost is near enough 7% APR.

CLAPTON

6.79% APR is a fantastically good rate ... if fact too good to be true

are you absolutely sure?

15,000 over 48 months at 6.79%APR would be monthly payments of about 350-360

the interest is based on the decreasing sum so obviously you pay a lot more interest in the first year than the last years

first year you would pay approx £910

Malky

As above, 6.97 is a fantastic rate. As it was a loan in principal, expect that rate to rise once a thorough credit check has been done. The rate quoted is likely their representative rate but if you're lucky enough to get 6.97% APR then the interest breakdown is as follows;

Year 1, 939.24
Year 2, 696.80
Year 3, 436.91
Year 4, 158.30

geoffky

Alarm bells should be ringing with that rate...it sounds too good..

YorkshireBoy

Milky_Mocha wrote: »

At that point I thought the rate Was high

Have you visited their website? Their representative rate (or rather the representative rate of the lenders they put you in touch with!) is 15.9% APR, although they do say they can get you loans with "rates from 7.00% to 162.8% APR" so I'm not sure why you think their best rate is "high"?

before going through the whole process again with another search

According to their website, until you make a formal application all searches are 'quotation' searches meaning no footprint is left on your Equifax file.

Milky_Mocha

Thanks for all replies. The rate was 6.97 and the lady on the phone said it was a fantastic rate and the reason I thought it was high was because the last time I took out a loan I paid just under 6% but that was 4 years ago. Also my credit rating is 999 and I have no debts apart from my mortgage and I clear my cc balance every month.

It would be annoying if after taking me through that long application process and coming up with that rate, they turn around to quote something higher. I think I'll go the credit card route.

Thanks so much.

YorkshireBoy

Milky_Mocha wrote: »

Also my credit rating is 999

No. Your [STRIKE]credit score[/STRIKE] made up number supplied by one of the CRAs (in return for paying them!) is 999.

It would be annoying if after taking me through that long application process and coming up with that rate, they turn around to quote something higher.

That's entirely possible. Just because the quotation search has been made of Equifax, it doesn't necessarily follow that the lender you/they choose won't search Experian (or even CallCredit).

I think I'll go the credit card route.

I would too. Just be careful not to breach the T&Cs, since doing so will mean your rate reverts to circa 17% APR.