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Interest rates explained

Fri 25 September 2020

Interest rates explained

When it comes to loans and finance, many consumers are still left perplexed or intimidated by what phrases such as ‘interest rates’ and ‘APR’ really mean.

Here we’re going to explain in simple terms just what an interest rate is, and give you the confidence to make informed choices as a customer.

What is an interest rate?

‘Interest’ is simply the cost of borrowing money from a lender - from a mortgage, to a credit card, to a cash loan or a doorstep loan, it means the same thing.

The amount of interest is worked out as a percentage of the cash you have borrowed, and is repaid alongside the original amount loaned to you.

For example, if you took out a £100 doorstep loan from a doorstep lender and they require you to repay £180, this would mean the interest rate on the loan is 80 per cent.

What does APR mean?

If you’re looking to borrow money, you will probably have seen doorstep lenders advertise doorstep loans with an ‘APR’ (annual percentage rate).

The APR is used to calculate what percentage of interest you would pay on a doorstep loan over 12 months - hence the word ‘annual’.

It’s a little bit different from the interest rate, as it also includes other charges and fees included with your loan (arrangement fees, for example) and takes into account how often you’ll be making repayments on your pay weekly loan.

APR allows people to compare financial products even if they’re being repaid over different amounts of time, and lenders are legally required to display it.

Remember that as well as looking at the APR, you need to be aware of how long the loan term would be and if there are any extra fees and charges before you make your decision.

Loans taken out over a longer repayment period might appear to have a low APR, even though you could end up paying more interest overall than a pay weekly loan with a slightly higher APR over a shorter term.

Why do lenders advertise ‘representative APR’?

If you see products advertised with a 'representative APR', this means that 51 per cent of customers get a loan at that specific rate, or lower.

This practice stops lenders from displaying an enticing-looking APR that only a few selected customers would be able to access, simply to attract new clients.

What does fixed interest rate mean?

Some responsible doorstep lenders, like Morses Club, offer consumers a fixed rate of interest, which means you never pay back more on your cash loan than you initially agree to.

With some doorstep lenders, interest accumulates for each day you have your loan, as well as every day that a payment is overdue, which could make it difficult to work out exactly how much you owe.

But with Morses Club the interest is calculated up front, so you'll be aware from the outset exactly how much you need to repay on any pay weekly loan.

Morses Club also have an interest charges calculator so you can work out your doorstep loan payments precisely.

It is always worth remembering that there are negative aspects to any kind of borrowing.

Before you consider it, you should think about if you really need to spend the money, and if you can afford to pay back the amount you’re planning to borrow. Independent advice is available here.

Morses Club specialise in small loans to help with unexpected expenses. Our loans aren’t right for everyone, and you should only borrow what you can afford to pay back. If you would like to find out if a Morses Club cash loan is right for you, read our FAQs for more information.

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