When you are comparing interest rates on loans then it is really important that you understand what you are comparing. The interest rate is usually used to describe how much interest you will pay on the money that you borrow. However, loans can often have other charges on top of this interest, such as start-up and admin fees. The AER Is a figure which includes these fees so that you can do a like for like comparison. These are often quoted when you see advertisements for short term loans or even those without a credit check, but when you look at bank loans, you tend not to see it. This means that it is not always easy to compare rates properly.
Therefore, you need to be sure that you are comparing your loans properly. There are some easy ways that you can do this and you might want to pick one that you will feel will work best for you.
- Ask the lender their AER – if you are a bit confused by all of the rates then asking the lender what their AER is can be easier. They should be able to give you the figure easily. Contacting them can be a good idea anyway as it will give you an idea of how easy it is to get through to them, how quickly they reply and how good their reply is. You will also be able to find out how polite and helpful they are. This could be useful if you do decide to borrow from them and you need to contact them for any reason.
- Find out how much the repayments will be and how many there are – it can be wise to find out how much you will be expected to repay and how often. For some loan types you will have regular repayments, for some there may just be one repayment and others there may be more flexibility with the repayments. The more repayments there are, the longer you will have the loan and the more expensive it will be. This is because interest will keep being charged for as long as you owe money. If you know how much you have to repay each month and for how long, you will be able to calculate how much you will repay in full.
- Ask how much you will repay in full – it can be really useful knowing exactly how much you will repay in monetary terms. This will allow you to calculate how much in fees you will be paying. This is a figure that you can use to compare with other lenders. You will also be able to think about whether you feel that this loan cost is justified and if you are prepared to pay it. You can consider what you are using the money for and think about whether you think that it is worth that extra money.
- Find out the interest rates and fees – it could be that you would rather find out what the fees are and what the interest rate is. Some loans may not have any fees anyway and you may just have to repay the interest.
- Investigate extra fees – all loans will have extra fees as well. These will be for things like missing a repayment of making a late repayment or perhaps for repaying the loan early. It is good to be aware of these as well because you will then be able to compare lenders that are very similar in other ways and decide between them based on this.
So, as you can see the difference between AER and interest rate is crucial and you need to understand it so that when you are comparing lenders you know exactly what you are comparing. If you want to know how much each will cost you then there are lots of methods that you can use. It is wise to pick the one that you will find the easiest to understand and that works for the type of loan that you are taking out. Most methods described work for loans with regular repayments but if loans have a more flexible repayment scheme such as with an overdraft or credit card, then you will be more limited in how you can compare them. However, as long as you compare them in a similar way, then you will know that you are going to be able to identify which will cost you the most money.
It can also be confusing that interest rates can change and so knowing how much a loan might cost could be tricky to work out if the rate is variable and therefore might change. However, it is best to assume the rate will stay the same, so that you can compare loans. If a rate does go up or down the chances of any loan cost also going up or down is the same so it would be very hard to predict what might happen and which loans might go up or down and which might. Assuming the rate remains constant is therefore the best method that you can use.