Understanding loan rates can be tricky but unless you know how it works, you won't be able to strike a profitable deal. Lenders often use complex interest rate calculations which makes it necessary for consumers to improve their financial IQ. So, if you are wondering how you can be sure of understanding loan rates and how to make sure you get your loan at the best rate, then we’ll tell you everything you need to know. Start by familiarizing yourself with financial terminologies and basic concepts of finance. Also, you need to have a good understanding of loan rates and how it is calculated.
When you borrow any kind of a loan, you must pay a price for it and that is called interest. Whether it is a credit card, loan, mortgage, or any other type of credit, the lender advances it to earn interest. Occasionally, you might hear about zero-interest credit cards — a promotional strategy that banks and lenders use. They offer an interest-free period on such a credit card which remains so only for a particular period of time and is known as the promotional period. Soon after the promotional period, the interest rates become applicable. Often, the interest rates charged post promotional period are higher.
Understanding Loan Rates
While borrowing a loan, you must make an informed decision but that’s seldom easy. Not unless you have some kind of formal education in business and finance. That’s because understanding loan rates require an understanding of financial terminologies like interest rate, base rate, APR, and more. You must also understand how to make sure you get your loan at the best rate. At Money Pig, we receive many questions from our existing and prospective customers about financial terminologies and their implications. So, we decided to answer some of them, so let’s get started.
FAQs | Understanding Loan Rates and Getting the Best out of it
- What is interest rate?
- What is base rate and how does it impact borrowers?
- How do you calculate interest rates on loans?
- What is APR and how is it calculated?
- Why do banks and financial institutions charge APRs?
- How to lower interest rates?
- What is the difference between the interest rate and APR?
- How to make sure that you get a loan at the best rate?
What is interest rate?
When you borrow an amount from a bank or a lender then you need to pay that amount borrowed along with a cost. The initial amount that you borrow is known as the principal amount and the rate of interest is the amount charged by the lender for allowing you to use his asset, which in this case is money. The interest rate is fixed by the bank after taking into account the current base rate which is put forth by the Bank of England. At present, the base rate is 0.10% as declared on the 19th day of March 2020. So, that means no bank in the UK can advance loans to its customers below 0.10% interest rate. Another point to note is that the interest rate must not be confused with APRs because they are very different. The only similarity is that both interest rates and APRs are borrowing costs. Since many people tend to use ‘interest rates’ and ‘APR’ interchangeably, we’d like to clarify that they are very different. That’s the key to understanding loan rates and ensuring that you get your loan at the best rate.
What is base rate and how does it impact borrowers?
Base Rate is the rate fixed by the Bank of England in the Monetary Policy Meetings, which are held eight times every year. So, the Bank of England may declare a change in the base rate in any of these meetings. If the base rate goes up then it is quite likely that your lender will increase your interest rates too. That’s because the commercial bank you are transacting with must pay more to the Apex bank, so it collects this excess from you, the ultimate borrower. However, you can avoid this by opting for a loan or mortgage that comes with a fixed rate of interest.
On the brighter side, an increase in the base rate is good news for those who have savings in their bank account because they would earn more interest on their savings. So, by evaluating the base rate put forth by the Bank of England, you can understand what the Government policy aims to achieve. A high base rate means that the policymakers want to lower the borrowings and encourage savings. Conversely, a low base rate would mean that they want to make it easier for people to borrow loans. We have seen this happen during the coronavirus recession as the base rate was dropped twice in March 2020. The current base rate is 0.10% and was declared on 19th March 2020. So, by understanding loan rates you can plan your finances more effectively and make sure that you get your loan at the best rate.
How do banks calculate interest rates on loans?
Banks earn profits through net interest margin (NIM) that banks disclose to the authorities on a quarterly basis. The NIM is the remainder of the difference between the interest that banks charge on loans advanced and pay on deposits. The interest rate is the cost of borrowing that the lender or the bank charges from the borrower after taking the base rate into consideration. This cost of borrowing or interest rate varies depending on the element of risk involved in advancing a loan. A bank determines this by performing a credit check on the applicant before sanctioning a loan. If you have a good credit score, then that reflects your prompt financial behavior and clean credit history.
Conversely, if you have a low credit score then things get difficult because the bank perceives you to be a high-risk individual and may deny the loan or charge higher interest rates. So, depending on the bank or lender’s internal policies, they may evaluate your credit file and offer you an interest rate. Usually, people with low credit scores are charged higher interest rates and vice versa. There’s no way to escape the consequences of a low credit score in the UK because the FCA makes it mandatory for all lenders to perform a credit check before advancing loans.
If you are having trouble getting a loan with a bad credit score, then consider applying to Money Pig. As a trusted intermediary, we do all that we can to live up to the expectations of our customers. That includes facilitating bad credit loans from lenders willing to advance it at a reasonable rate of interest. Finally, the interest charged can be of two types — fixed interest rate and floating interest rate. It is always recommended that you pick fixed interest rates that remain constant throughout the loan tenure. So, spend some time trying to understand loan rates and how to make sure you get your loan at the best rate. Doing this can help you make the right financial decisions and in that process, you might save up a lot of money.
What is APR and how is it calculated?
Annual Percentage Rate often abbreviated to APR refers to is the aggregate cost incurred on borrowing a loan. This includes the interest rate, loan set-up fee, loan processing fee, and other costs that a borrower incurs while borrowing a loan. So, interest is just one of the many costs that are included in the APR, which is then converted into percentage over a 12-month period to ascertain monthly costs. This is then added to the monthly payments that the borrower is required to make.
It is worth mentioning that you need to be sure of the type of interest rate calculation in the APR. The interest rate included in the APR could be charged on a fixed rate or variable rate of interest. So, you need to dig into the details and find out what type of interest rate you are going to be charged before signing any documents. You can find that out in the loan agreement, so it is always recommended that you read it in detail before entering into it.
Both fixed and variable interest rates have their own advantages and disadvantages. For example, the variable interest rate varies depending on the market and is risky. However, if you are willing to take the risk then this could also prove to be beneficial because these interest rates can go down. On the other hand, a fixed rate of interest, as its name implies remains fixed. It is ideal for those who have a fixed income and wish to avoid risk.
Why do banks and financial institutions charge APRs?
APRs help potential borrowers get a better understanding of the costs involved in borrowing a loan and ensures standardization. That makes it easier for an average customer to compare the APRs offered by multiple banks and lenders. As a result, it gives the customer more clarity about the costs that go into borrowing a loan. Also, it gives borrowers a thorough understanding of loan rates and how to make sure you get your loan at the best rate.
Without standardization, comparison of the borrowing costs can be complex and time-consuming. For example, if Bank A offers you 3% interest rate and Bank B offers you 8% APR, then you are likely to choose Bank A. However, Bank A’s interest rates may be low but along with set-up fees and loan processing fees, the APR could be higher than that of Bank B. So, to avoid ambiguity and to provide clarity, all banks in the UK offer APRs.
However, some unethical lenders try to remain silent on certain costs and calculations to mislead borrowers. So, you must always transact with reputed and reliable lenders. Money pig can connect you to a network of FCA-licensed direct lenders who offer different types of short term and long term loans.
How to lower interest rates?
Borrowing a loan comes with many risks and one of them is the inability to repay the loan on time. As that could have a direct impact on your credit score, you need to be doubly sure of being able to repay the loan. You can do that by saving up some reserve funds in your account and also by keeping your monthly payments, including the interest rates low. You can do that by borrowing a loan for a longer duration because that lowers your monthly repayments. Also, most lenders offer lower interest rates to those who borrow loans for a longer duration because that’s more profitable for them.
Another way to lower interest rates is by negotiating it based on your credit score. A good credit score indicates that you are a reliable person who is most likely to repay the loan promptly and without any delays. That makes you a low-risk individual and for this reason, most banks and lenders offer lower interest rates to those who have a good credit score. So, to get the best deal, you must have a fair understanding of loan rates and how to make sure you get your loan at the best rate.
Finally, before you borrow a loan, make it a point to seek clarity about the costs included in the APR and the ones that are not. Some lenders may try to trick you into a deal and so you must refer to the loan agreement and make sure that you won’t be charged additional costs. Else, the lender may withhold some costs like the set-up fees and loan processing fees from the funds sanctioned to you. If you are unable to find a reliable direct lender or are worried about a low credit score, consider submitting an online application to us. At Money Pig, we partner-up with sincere and dependable direct lenders who have been in the business for quite some time.
What is the difference between the interest rate and APR?
Annual Percentage Rate (APR) is the yearly cost incurred for borrowing a loan which includes the interest rate along with other costs such as set up fees, loan processing fees, etc… However, the interest rate is what the lender charges from the borrower in exchange for the money advanced. Since the APR is more elaborate and comprehensive, it provides better clarity about the borrowing costs.
APRs are further classified based on interest rates charged — fixed interest rates or variable interest rates. You will find this explicitly mentioned in the loan agreement and must confirm that before moving forward with the deal. We say this because we know its not always easy to find reliable, transparent, and ethical lenders in the UK. Therefore, Money Pig brings you a network of direct lenders willing to offer you the best deals. Nevertheless, to get the best deal you must have a thorough understanding of the loan rates and how to make sure you get your loan at the best rate. For free quotes, fill and submit our online loan application. We do not charge you any loan application or loan processing fee to do this.
What happens if UK interest rates change?
When you hear about changes in the UK’s interest rates then you are probably referring to the base rate put forth by the Bank of England. As all commercial banks in the UK must pay the base rate as interest, they tend to charge this from customers. So, when the base rate goes up then your liability is also likely to increase. However, its effect on your repayments can only be determined by analyzing the basis on which the interest rates are calculated. You can find that out from your loan agreement. If you borrowed the loan on a fixed interest rate then you may not be affected until the end of the fixed period. In the case of variable interest rates, an increase in the base rate means an increase in the interest you owe to the bank. With some understanding of loan rates, you can get your loan at the best rate.
How to get a car loan at the best interest rate?
With a good credit score, getting a low-interest car loan is not much of a hassle. That’s because the auto loan sector is highly competitive, and you can easily negotiate a profitable deal. Plus, by borrowing the car loan for a longer duration you can further lower the interest rates. So, you first need to have a basic understanding of loan rates and how to make sure you get your loan at the best rate.
While that’s all there is to know about car loans, it is worth mentioning that it is not the only way to finance your car. In fact, it is something that you must try to avoid because you will not own the car until repayment. In case of car loans, the lender owns the car until full repayment, and then the title is transferred to the borrower. By then, the vehicle would have depreciated considerably, and you may not be able to get a good price for it.
Therefore, it is always recommended that you buy a car with your savings and a personal loan. That enables you to own the car from the very beginning. Money Pig’s lenders offer personal loans at competitive interest rates and you can use them to buy any car you wish to, whether that’s brand new or pre-owned. If you are a full-time student, then you can borrow our student loan and use it to finance your car just the way you use a personal loan.
Will loan rates go down in the UK?
Following the move made by the authorities on 19th March 2020 to manage the coronavirus recession, the UK’s current base rate is fixed at 0.10%, which is an all-time low. However, the policymakers may increase these rates anytime during the year. As commercial banks pay the base rate on their borrowings to the Bank of England, any increase would have a direct impact on those who are paying variable interest rates on their loans. Those paying a fixed rate of interest would see the difference only after the ‘fixed’ period.
How to make sure that you get a loan at the best rate?
Getting a loan at the best interest rate is only possible when you have a good understanding of loan rates and know how to make sure you get your loan at the best rate. You can do that by requesting quotes from multiple banks and direct lenders by filing individual applications. If that does not seem feasible then consider applying to a financial intermediary like us. Money Pig has a wide network of lenders who offer all types of loans at highly competitive interest rates. Also, we do not run hard credit checks upon receiving your loan application like banks and individual lenders do. In fact, we do not perform a hard credit check on you. Instead, we stick to performing a soft credit check to assess your repayment capability.
At this point, it is worth mentioning that hard credit searches show up on your credit file for at least two years. However, soft credit checks do not and therefore we stick to performing soft credit checks. Once we do that, we then share the data with our direct lenders. You then receive a quote from them and only upon acceptance of the quote, the lender would perform a hard credit check on you. All our direct lenders follow these protocols laid down by us in order to protect your credit scores. This isn’t the case when you apply to banks and individual direct lenders as each would perform individual hard credit checks on you. Too many credit checks could negatively impact your credit score and ruin it.
Do you have a fair understanding of loan rates and how to make sure you get your loan at the best rate? If not, then no worries! Money Pig brings you the most transparent and ethical lenders in the financial services industry. For low-interest quotes, Apply Now.