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Exploring APR Finance Calculations

Finance Calculator - Buying Goods On Finance

Use the sliders below to select your loan amount, deposit, etc and get instant feedback on the total amount you'll need to pay back and your monthly repayments

How Loan Payments and Interest Are Calculated

You need to pay back any money you borrow; the interest on that loan and any hidden costs such as arrangement fees when you agree to a loan.

Interest Rates

Interest is often calculated on a monthly, weekly or daily percentage of the amount of loan outstanding on any given date. These costs are standardised for comparison purposes using the "Annual Percentage Rate" (APR) so it's not always obvious; how much you need to pay back or what your monthly cost will be for that loan.

Principal, Interest and Fees

First, let's look at some of the technical terms you may encounter when applying for finance:

• Principal
  

  The actual amount you receive into your bank for a cash loan or the value of goods you intend to purchase after taking off any deposit paid and other expenses

• Interest
  

  This is the amount the lender or finance company charges you for providing a loan. This can include the interest rate for the loan and any up-front charges. Most loans have a fixed rate but that may change over the period of your loan in line with inflation

  The interest rate can vary from lender to lender and may depend on your credit score. A poor credit score will most likely increase the cost of borrowing.

• Fees
  

  These can vary; sometimes you may need to pay an arrangement fee to a broker or company to set up the initial loan. There can also be ongoing fees such as penalties for missed payments. Late payments can also incur hidden costs such as bank charges for having insufficient funds

Longer Payment Period - Lower Monthly Costs

Borrowing £1000 and paying it back over 2 years instead of 1 should naturally result in a lower monthly fee but there will still be interest charges and possibly fees that will result in paying back a larger total amount over the longer period. This could make a loan more affordable so there are tradeoffs

Typical Finance - The Amortizing Loan

You need to pay back the money you've borrowed and any interest over a given time period, such as 1 year. So, finance is usually calculated so that each month your payments are the same. This means that at the beginning, more of your payment goes to repaying the interest while at the end, more of the monthly amount goes to paying off your loan (principal).

Reduce Costs and Save Money

If you experiment with the sliders above; you should be able to see the influence that interest rate and time have on the final amount you need to pay back and the cost of the loan to you.

Only borrow what you need. Pay the largest deposit you can afford and if the loan agreement allows you; pay extra when possible. If you have time and flexibility; try getting a bank loan or a credit card offering zero interest for new clients or on balance transfers rather than loans with higher interest rates if you can possibly avoid it