There can be a huge difference between a short-term loan headline interest rate and the APR – which you ignore at your peril. The devil is in the detail with regards to charges and with lenders now legally obliged to quote the APR, as well as the headline interest rate, it is relatively easy to compare and contrast.
There are four main factors to consider with any type of finance, principal amount, headline interest rate, term and the APR (annual percentage rate).
Your eyes can naturally be drawn to attractive headline interest rates, sometimes ignoring the APR which gives the whole picture.
Applying for a Short-Term Loan
There are now a number of different options for those looking to secure short-term finance which is dependent on their financial status. The Internet has opened up an array of opportunities to research and actually apply for funding online, in the comfort of your home at your convenience.
Short-term loan lenders are often associated with loan terms of 30 days, but under current regulations, they can offer loan terms of up to 12 months. It is also worth noting that legally they are obliged to quote not only the headline interest rate but also the APR.
The quoting of the APR figure allows you to directly compare and contrast different offers after seeing the “real” cost to borrowers.
What Is the Difference Between the Headline Interest Rate and APR?
The best way to describe the difference between a headline interest rate and APR is the inclusion of fees and charges on applications and going forward.
If we use the example of a £1000 loan, an interest rate of 50% with an initial set up fee of £100 then the situation is as follows:-
Interest payment 50% x £1,000 = £500
Principal loan plus setup fee = £1,100
Interest paid on the gross loan = 50% x £1,100 = £550
APR calculation, £1,000/£550 = 55%
So, while the headline interest rate on this particular loan is listed at 50% when you add in the setup fee, the APR is significantly higher at 55%.
Therefore, when comparing and contrasting different short-term loans, it is important to focus on the APR as opposed to the headline interest rate.
Why Are Headline Interest Rates Even Quoted?
When you consider the relationship between headline interest rates and the APR, you might wonder why interest rates are even published. Surely it would make more sense to place enhanced focus on the APR, which is a more realistic indication of the cost of borrowing?
The focus tends to revolve around headline interest rates because they are lower and therefore attract the attention of potential customers. Once a lender has your attention then you can obviously look at elements such as the APR, but fees and even interest rates may be negotiable.
You may also find that those with varying credit histories will attract varying rates of setup charges and fees going forward.
As a consequence, the lender may charge a range of different APRs depending upon each individual applicant’s financial status.
How Can I Reduce the APR?
In reality, the APR will at best equal the headline interest rate, and more commonly it will be higher.
There are numerous ways in which you can reduce the APR which include:-
- Negotiating reduced setup fees
- Use collateral
- Consider a guarantor
- Introduce secure income streams
When looking at the use of collateral, guarantors and secure income streams, this should help to reduce the headline interest rate, and the APR would follow.
The APR basically takes into account any additional charges in setting up and managing your loan facility. However, the greatest influence on the APR is the underlying interest rate on the loan.
So, if you can reduce the risk associated with your loan application, this would reduce the headline interest rate and ultimately the APR.
How Can I Reduce/Avoid Setup Fees?
In reality, the stronger your financial position (whether this includes collateral or a guarantor), the more attractive you will be to lenders – potentially allowing you to introduce a degree of competition amongst lenders.
If a number of lenders are competing for your business, then this puts you in a relatively strong negotiating position to reduce or even eliminate setup fees. This can be difficult for applicants with a chequered credit history, but there is still scope for negotiation in the majority of situations – as long as there is more than one lender willing to consider your application for finance.
While there may be opportunities to directly negotiate with lenders regarding setup fees, etc., many people employ the services of credit brokers to find the best terms and negotiate the best deals.
Whether you use an independent broker or a tied broker, you tend to find they have strong relationships with many lenders in the market.
As a consequence, if you approach a broker with expertise in short-term finance (perhaps those with troubled credit histories), they may have arrangements in place to reduce or remove setup fees.
It will depend upon the level of business they are able to channel towards their lending partners – something you could benefit from.
Increasing the Principal Loan Amount/Loan Term
When checking out short-term loans, you will probably have noticed that some lenders will offer a reduced headline interest rate/APR the more money you borrow. Obviously, this will need to be within your affordability factor, and there is no point borrowing excess money for the sake of it.
You may also see evidence of reduced rates on arrangements towards the higher end of the short-term range, in this case, 12 months. The specific terms and conditions, and varied interest rate/APR, will differ between lenders, but there may be an opportunity to reduce the APR.
At best, the APR will be in line with the headline interest rate, although where setup fees and additional charges are incurred, it can be significantly higher.
The calculation of the APR figure is relatively simple, and it allows you to directly compare and contrast different loan offers. Whether there may be opportunities to negotiate a reduction in setup fees or other charges will likely depend on your financial status.
The use of credit brokers has proven financially beneficial for many borrowers as brokers tend to have close contact/relationships with lenders.
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
To apply and see what loan is available to you, click on the below and answer the question