Finance Explained

Finance Explained

According to the Financial Conduct Authority (FCA), twenty per-cent of consumers are unaware of how a high or a low APR will affect them. Before one can understand the effects of APR or interest rates, one must know what they are.

APR – Annual Percentage Rate

When a consumer takes out a loan, they are ‘borrowing’ money from a financier. The interest rate is the charge that the financier places for lending the sum. For example, if a consumer takes out a loan for £1000 with 10% interest, they will pay back £1100; this means that they will have paid back the £1000 that you owed, plus a fee of £100 to the financier.

Annual Percentage Rate, abbreviated to APR, is the cost of the loan. This is the original loan amount, plus interest and any associated fees. Miscellaneous fees can include documentation fees, tax and insurance. The FCA say that; “APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. The APR takes into account not just the interest on the loan but also other charges you have to pay, for example, any arrangement fee. All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender.”[1] To give an example; an interest rate could be 14% per annum, but the APR is 17%, as the impact of the charges adds the equivalent of 3% interest.

Flat Rate

Most finance contracts operate on a ‘flat rate.’ The flat rate is calculated to encompass the rate charged by the finance company, the necessary tax and any fees. A flat rate is calculated at the start of the contract, and it set for the duration of the term. Despite a decrease in the amount to be repaid, each payment will have the same amount of interest applied to it. For example, if a consumer was to take a loan out for £10,000 at a flat rate of 10%, payable in five installments, over a term of twelve months, the charge for the entire term would be £1000. This would mean that the consumer would pay twelve installments of £916.66.

Flat rate only takes into account interest. It does not include documentation or miscellaneous fees. At the start of the contract, these will be declared as either an initial or final payment, by your financier.

Fees

Most finance brokers are paid a commission by a lender for conducting business on their behalf. The broker may also pay an authorised Vehicle Dealer a commission, calculated as a percentage of the finance interest quoted or on a case-by-case basis. The commission payments amount will be made available to you on written request to either the broker or the authorised Vehicle Dealer. This commission amount is of no direct cost to the customer, and the customer will not pay any fee to the broker for their services.

Should you have more queries or questions, do not hesitate to contact us. One of our customer service representatives will promptly respond. Alternatively, many of your questions can be answered via our twitter page @creditasfs.

Sources: The Interest Rates Guide, www.moneysavingexpert.com

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Finance Explained

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