APR vs the total cost

Lesson 2 of 11 in our free Good Debt vs Bad Debt guide: a 5-minute money game with the key points below.

This lesson is in the full version.

Free with a code from your uni, college, council, landlord or employer (worth £600/year). Lesson 1 of Good Debt vs Bad Debt is free for everyone.

Questions you'll answer

Illustration: £5,000 borrowed at 9.9% APR, repaid over 5 years at £104.95 a month. Roughly how much interest is that in total?

Same £5,000, same 9.9% APR. Why does the 5-year loan cost more than the 3-year one?

9.9% a year, including compulsory fees → How it compares (APR). APR: a standard yearly cost for comparing deals.
£6,297 over 60 months → What leaves your account (total payable). Total amount payable: the real-world cost.
'Representative' rate in an advert → How it compares (APR). A representative APR is what at least half of successful applicants get. You might be offered more.
Monthly payment times number of months → What leaves your account (total payable). That's how you work out the total yourself.
Myth: “The loan with the lowest monthly payment is always the cheapest.” — Stretching the term lowers the monthly figure but usually raises the total.
Fact: “An advert's representative APR might not be the rate you're offered.” — Only at least half of successful applicants must get it. Your rate depends on your file.
Fact: “Paying a loan off early usually reduces the total interest.” — Less time owing means less interest, though some loans charge a fee for early repayment. Check the terms.