Working out a repayment plan for your borrowing

It’s crucial to work out the total cost of the credit you’re taking out, including interest payments, and not just the amount you’re borrowing or how much you can afford to pay every month. Taking the time to work out the full cost of any borrowing lets you plan your finances and ensure that you really can afford it.

 

What affects your borrowing costs

How much you’ll pay to borrow money depends on how much you need and how quickly you plan to repay it.

For example, if you want to borrow a small amount over a short period of time with a low interest rate, you might well pay very little interest (or none at all if you use a credit card charging 0% interest).

On the other hand, borrowing a large amount of money over a long time will cost you more.

In general, use the APR to compare products.for more info you can visit http://www.critiirick.com/

The lower the APR the better, but also look at how much it will cost overall.

This will usually be more for a longer-term loan even if the APR is less, and will show as the total amount payable.

In the end, he takes a look at his monthly budget and decides that he can afford to take out the credit card and pay the extra £10.76 each month to avoid having to pay any interest.

It means he will have paid off the balance in 15 months and he won’t have been charged interest.

John will only save money because he knows he can make the payments within the 15 months.

If you don’t think you would be able to do that, a credit card could cost you more.

What this table shows is the difference in repayment plans over different periods of time and how being able to pay a little more each month might mean you’re able to take out a much cheaper form of credit.

It also highlights the importance of shopping around for credit and not just taking the first product you are offered.

Always spend some time shopping around for credit. Use comparison websites to look at different deals.

Be aware of any extra charges or fees. All loans should tell you how much you’ll pay back overall, including any interest.

A loan agreement will have an amount you have to pay back every month.

It might charge an early repayment fee if you do clear it ahead of time.

Repaying your loan early at any time, in full or part, can be a good way of minimizing cost.

If you took the loan out before 1 February 2011, the most you can be charged is two months’ interest.

If you took the loan out after 1 February 2011, by law no fee can be charged for early repayment.

That is unless the amount repaid early exceeds £8000. Even then, the amount is capped.

You can ask the lender for a ‘settlement statement’ showing how much you’ill save by repaying early.

Other forms of borrowing such as overdrafts and credit cards are more flexible with low or no minimum repayment.

But the interest rates on these tend to be higher and some overdrafts charge an initial arrangement fee.