While most people are aware of APR and the impact it can have on the amount of money you need to pay when paying off a loan, it is often best to review it with numbers. It is good to understand the theory behind loan repayments but to make sure that you really understand, take the time to bring in real-life examples.
If you borrowed £1,000 the length of time that you wanted to pay it back over would impact on the overall amount of money that you have to pay. A £1,000 loan paid back over 24 months (so 2 years) with a representative APR of 48.9% would see a total of £1,475.04 being required to be paid to the lending company. Dividing this by the 24 months would see an individual making monthly payments of £61.46.
You would need to make sure that you could afford to pay this every month and if you were unable to allocate this level of fund, you would be advised to look into paying the loan back over a longer period of time. This is why understanding APR is vital.
A £1,000 loan paid back over 36 months (so 3 years) with a representative APR of 48.9% would see a total of £1,742.40 being required to be paid to the lending company. You would then take this sum of money and divide it by the 36 months and you would end up with monthly payments of £48.40.
You can pay more in total but less every month
You can see that borrowing over a longer period of time increases the amount of money that you need to pay, because you are paying interest for a longer period of time, but the amount of money that an individual pays every month is lowered.
This is why you need to think about your own circumstances and find the solution that is best for. You would think that paying as little money as possible for the loan is the best solution but if you cannot afford the associated monthly payment, this isn’t an option that is viable for you. It may be that paying more in the longer term is better for you because this lowers the monthly payments that you need to make.
Taking the time to ensure you know what you have to pay, and when, will help you to make the right decisions when it comes to finding the right loan for your needs.