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Why APR isn’t a Good Indicator of Value for Short Term Loans

If you have only ever heard one thing about short-term loans – sometimes also known as payday loans – it’s probably that the interest rates charged are astronomically high in comparison with other types of loan. It’s a narrative that is repeated a lot, but one that is more misleading than you might think.

The biggest problem is that short-term lenders are required to display and disclose the APR attached to any loan they make. And yes, 1261% APR sounds very high. However, when you are talking about a small short-term loan the APR simply isn’t a good indicator of value at all.

 

What is APR?

Basically the APR – Annual Percentage Rate – is a number that describes the cost of a loan in annual terms. It is rather different to an interest rate.

An interest rate refers only to the interest charged on a loan, and it does not take any other expenses into account. In contrast, APR is the combination of the nominal interest rate and any other costs or fees involved in procuring the loan. As a result, an APR tends to be higher than a loan’s nominal interest rate.

Knowing the APR, especially on a large loan like a mortgage, can be very helpful. In the case of a small short-term loan it can also be rather misleading for the following reasons:

APR and Loan Size

From a lender’s point of view, the additional costs of providing a small loan are the same as those of providing a larger one. A smaller short-term lender still needs the same equipment and staff to process a loan as a larger bank does. However, a longer loan term means that a lender can actually recover more of their costs, but in a less visible way.

This means that the APR on a larger, long-term loan appears to be lower than that on a short-term loan. But in reality, 10% of a £200 loan is £20, whereas 10% of a £20,000 loan is £2,000. Who earns more? Exactly, but the two lenders are judged in the same way when you base everything on APR.

In fact, let’s imagine for a second if everyday items were priced in a similar way to APR.

What if, when you went to the pub all the barmaid would tell you is that your favourite lager was £125 a barrel when all you want is a pint? It would be confusing and even rather silly. And judging a short-term loan’s true costs based on APR is a very similar thing.

APR and Loan Length

A short-term loan is exactly what its name says. A loan taken out over a short period of time. Usually no more than a few months and in many cases just for a few weeks. A mortgage, on the other hand, is taken out for somewhere between 15 and 30 years.

This means that the APR on a mortgage loan is lower than a that on a short-term loan, although a mortgage lender can they recoup anywhere up to 100% interest whereas payday lenders only charge 0.8% per day, a much lower representative interest rate than many think.

APR and Risk

There is a reason why you need a great credit rating to secure a personal loan or a mortgage from a traditional bank. They don’t like to take too much of a risk. Any loan is a risk of course, but larger lending institutions minimize that risk by limiting the loans they make to those with demonstrated good credit.

Many short-term lenders – most of them in fact –  do consider those with poor credit for a loan. They still take precautions – by verifying that the borrower has a steady income, that they are who they say they are etc. – but by largely overlooking a poor credit rating they are taking a bigger risk.

Any time a loan represents a larger risk, there are likely to be higher interest rates attached. It’s not just loans either.

If you have a poor driving record your car insurance rates are higher until you can demonstrate that you’ve improved. If you live in a big city rather than a small village your home insurance will be higher. And thanks to recent changes in both the law and the industry itself UK short-term interest rates are some of the lowest in the world.

In fact, interest rates have been capped at 0.8% per day, and charges such as a default fee have been capped at £15. This means that customers are better protected than ever when it comes to borrowing a short term loan with the likes of LoanPig and other lenders.

How to Really Judge a Short Term Loan

So, if APR is not the best way to ‘judge’ a short-term loan what is? Here are some of the things to keep in mind and ask yourself when considering taking one out:

What do I need this loan for?

Should you take a short-term loan just so you can go on holiday with your mates? No, probably not. Should you take one so that you can pay something like your rent on time and avoid those inevitable late charges your landlord will slap on? Quite possibly.

Will I be able to pay this loan back on time?

Often a short-term lender will offer several different repayment schedules. Ideally, you should take the shortest as the loan will cost you the least that way. But be realistic. If paying the loan back in 3 weeks versus 3 months is going to leave you strapped for cash again you could be putting yourself in a precarious financial situation.

Do I understand the loan terms?

People hate reading the small print. Do you ever read the agreement Apple makes you sign when you update the iOS on your phone? No, of course you don’t, no one does. When considering taking out any loan though it’s crucial that you do.

A reputable lender lays out all the terms attached to any loan for consumers to read before they ‘sign on the dotted line’. But they can’t force them to read them. That’s  up to you.

Before taking a short-term loan ensure you understand everything. And if something isn’t clear, ask. At Loan Pig we build our loan payments on trust, and we never want our customers to default. So we will always do our best to ensure that any short-term loan you take will be beneficial for you, even if we have to answer a hundred questions you might have.

 

The post Why APR isn’t a Good Indicator of Value for Short Term Loans appeared first on LoanPig.

source https://www.loanpig.co.uk/why-apr-isnt-a-good-indicator-of-value-for-short-term-loans/

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Your Credit Rating is Important – So Here’s How You Repair It

As most people are very well aware, having a good credit rating can open up a lot of opportunities for you. You can get a loan to buy a house or a car, get a good credit card that has a low rate of interest and a decent rewards program and you are generally seen as a financially responsible individual, by banks, building societies, other lenders and even landlords and prospective employers.   

Bad credit happens though. Just a few missed payments – or even just late payments – can really drag your credit score down. People in this situation have one big question on their minds – how do I repair my credit rating?

 

Repairing Your Credit Rating – Getting Started

The first step to effective credit repair is knowing just what is on your credit reports. In the UK that means checking with each of the main credit reporting agencies; Experian, Equifax and Call Credit.

Under the law, you have the right to request a full copy of your credit report for £2. All three agencies offer regular access to your file and other services at a much higher cost of around £15 a month, but it’s generally not necessary to pay for these services.

Why check all three? Annoyingly the information contained on each report is rarely exactly the same. It is up to a creditor to decide which credit reporting agencies they send information to and often it is not all three.

In addition, you have no idea which agency a potential lender will contact for a report on you, so it’s crucial you understand just what information each individual agency holds on you.

Once you have your credit reports on hand go through each of them line by line. You are really looking here for two things. The first is debts you may have forgotten, like a magazine subscription you forgot to pay, it was only £12 per month but the debt was reported to a credit agency anyway. This kind of small forgotten debt is common and it can affect your credit rating as much as a big debt does.

The second thing you should be looking for are mistakes. Mistakes on a credit report are quite common, but they often stay there because people simply do not know they exist.

What’s on a Credit Report Anyway?

If you have never reviewed one before it’s very likely that you are not sure just what kind of information you are likely to find on your credit report when you do receive it.

In general, your file will include:

• Your name, address and date of birth
• “Search footprints” such as recent credit applications
• Financial links to other people – for example, a joint bank account or loan  
• Any late/missed payments or defaults
• How much money you owe to lenders
• Any County Court Judgments (CCJs) against you
• If you’re on the electoral register at your current address
• If you have been declared bankrupt or entered an IVA (Individual Voluntary Arrangement).

It won’t include the following information:

• Your salary
• Student loans
• Medical history
• Criminal record
• Council tax arrears
• Parking or driving fines

Repairing Your Credit Rating – Start Talking

If you have valid, outstanding debts it is very important that you call your creditors and try to make workable payment plans in order to get your debts cleared off as quickly as possible.

People are often afraid to do this and ignore collection calls and letters instead. However, even though the people calling to collect the debt can be a bit unpleasant (not all of them but quite a few) if you remain calm and ask to speak with a supervisor if necessary a fair payment plan can usually be worked out – after all these people want their money even if it takes a while.

Repairing Your Credit Rating – Fixing Mistakes

If you have found a mistake on your credit report it is important that you challenge it as soon as possible. Send a registered letter to the credit agency detailing your claim and include copies of any proofs you have that the entry is invalid like a canceled cheque that proves you paid a debt that is still showing as unpaid ( a very common mistake.)

The credit agency will then open an investigation and contact the creditor to get their side of the story and a decision is usually made within 90 days at most. If it is decided in your favour the item comes off your report.

Repairing Your Credit – Building a Better Credit Future

So, you’ve begun settling existing debts and you’ve challenged any mistakes you found on your credit report. These things will help your credit rating build up, slowly, but there are some other things you can do to help speed up the process:

Make Sure You Are Registered to Vote

It might seem like a little thing, but if you are not on the electoral roll for your current address that is marked as a negative on your credit report. Registering only takes a few minutes online (really, less than five) and you only have to do it once (unless you move)

Keep Paying Your Bills On Time

Even being late on your mobile phone contract can have a negative effect on your credit rating. If you have trouble remembering when bills are due setting up an auto payment agreement can help or even just making use of a smartphone app like GoodBudget can be very helpful as well.

Consider Taking Out a Credit Builder Loan

Why would anyone ever tell you to take out a loan when you are trying to repair your credit? Because paying off a small, short-term loan successfully can give your credit rating a nice boost.

Many short-term lenders are not as concerned about your credit rating as traditional banks are, so even if you currently have a very bad credit rating you should be able to obtain a small loan.

You will be charged interest on the loan, but it’s not as much as you probably think. For example, these would be the numbers on a £75 loan taken out over 3 months:

• Borrowing £75.00
• Interest £39.13
• Monthly repayable £38.04 over three months
• Total repayable £114.13

So the cost of the loan would effectively be a little under forty pounds. That’s a lot less than the fees charged for a special ‘credit builder’ credit card and the three-month reporting of on-time payments will give you a great start on your credit rating building efforts.

 

The post Your Credit Rating is Important – So Here’s How You Repair It appeared first on LoanPig.

source https://www.loanpig.co.uk/credit-rating-important-heres-repair/

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