APR, fees and repayments: what borrowing really costs
The monthly payment is only part of the picture. Learn how APR, fees and the repayment term affect the full cost of borrowing.
Two borrowing offers can have very different costs, even when you receive the same amount of money. One might have a smaller monthly payment but take longer to repay. Another might include fees that aren’t obvious at first glance.
Before choosing, look at both what you can manage each month and what you’ll pay back in total.
What does APR tell you?
APR stands for annual percentage rate. It expresses the yearly cost of borrowing, including interest and compulsory fees, using standard assumptions. It can help you compare offers, especially for the same amount and repayment term.
APR is different from the interest rate on its own. It also doesn’t tell you whether a repayment fits your budget. Read the offer and the pre-contract information alongside it. MoneyHelper explains the information lenders provide in its guide to managing credit.
The advertised rate might not be your rate
A “representative APR” is an advertised rate, rather than a promise about the rate you’ll receive. Your individual offer can be different. Check the APR, charges and repayments in the offer made to you before agreeing. MoneyHelper’s comparison website guide explains why advertised rates can differ from individual offers.
A smaller payment can mean a bigger total cost
Here’s a simplified example of borrowing £1,000 at 20% APR, with no additional fees, a fixed rate and equal monthly payments:
- Over 12 months: about £92 a month, repaying about £1,102 in total. The borrowing costs about £102.
- Over 24 months: about £50 a month, repaying about £1,202 in total. The borrowing costs about £202.
The longer term reduces the monthly payment, but adds about £100 to the total cost in this example.
These are rounded illustrations, not a quote or a FINN product offer. The examples assume monthly repayments start one month after borrowing and the rate stays the same. Actual offers can differ because of fees, payment dates and terms.
Check these five things together
- Amount received: how much money will actually reach you?
- Monthly payment: can you cover it after essentials, including in a lower-income month?
- Length of repayment: how many payments will you make?
- Total amount repayable: how much will you pay back altogether?
- Other terms: what happens if you miss a payment, repay early or the interest rate changes?
Make sure you understand any fees and when they apply. If something isn’t clear, ask the provider before agreeing.
Pause if borrowing is covering a regular shortfall
If you need new credit to keep up with bills or existing repayments, it’s worth looking at the underlying gap first. Another payment could make next month harder.
MoneyHelper’s guide to whether you need to borrow can help you think through alternatives. If debt is already difficult to manage, you can find a free debt adviser.
One small step: write down the monthly payment and the total amount repayable for any offer you’re considering. Check both before you decide.
