Low Rate Loans

There are literally thousands of loans available in the market place in the UK today, many different types of loan from many different lenders, all of whom are competing for the same business...yours!

What are Low Rate Loans?

The choice seems to be endless for someone searching for any type of loan and it can be quite a daunting task finding exactly the right option for your own particular circumstances. Usually the first factor which an individual is likely to take into account is the cost of the loan. The monthly cost can be reduced by extending the overall term of years which the loan runs for, however the best indication of a low rate loan is shown in the interest rate. A low rate loan is likely to be cheaper overall than one with a higher interest rate, assuming all the other relevant factors remain the same. It could be quite possible for the monthly repayments on a low rate loan to actually be more than those of a loan with a higher rate if, for example, the low rate loan was taken over a shorter term of years. This would be due to the fact that the amount of capital initially borrowed has to be repaid over a shorter time and therefore each monthly repayment would include an increased capital element. The interest payable on a shorter term low rate loan would be charged for less time also, having the effect of reducing the total cost of the loan significantly.

Making sure you get a good deal

So how is it possible to determine which is a low rate loan and which is not? The first area most people consider is the headline monthly interest rate charged. This is usually displayed on the promotional literature provided with the loan application form. This rate, however, does not take into account other fees and charges which may be payable on the loan, whether or not they are added to the initial sum borrowed, or paid up front. For a true interpretation of the cost of a low rate loan, the most relevant figure to take notice of, is the other rate which must always be shown on advertisments and documentation relating to the loan, this of course, is the Annual Percentage Rate, or APR as it is more commonly known.

Identifying Low Rate Loans through APR's and Interest

The Annual Percentage Rate (APR) not only considers the monthly interest rate charged, but also takes into account other factors such as, any valuation fees, arrangement fees, broker fees, etc. and whether or not these are added to the loan (if an arrangement fee were to be added to the loan, for example, this would increase the total balance of the loan and interest would be charged on this larger amount, therefore increasing the APR. If the fee was not added, no extra interest would be charged and as a result, the APR would be lower). Another factor affecting the APR is the method by which interest is charged on a low rate loan. Interest can be charged on a loan on either a daily, monthly or annual basis.

Understanding Daily and Annual Interest

For a loan which charges interest on an annual basis, the total amount of interest for the year is added at the beginning of the year in question and is charged on the total outstanding balance of the loan at that time. For a loan which charges daily interest however, the interest is calculated every day on the remaining balance of the loan. This has the advantage that as the capital balance of the low rate loan decreases over the course of the year, so does the interest charged and therefore a loan with a daily interest rate will work out cheaper than a similar loan, with the same interest rate, but calculated on an annual basis.

Whether a low rate loan has daily, or annual interest charges can make a significant difference to the overall total cost of the loan over a number of years. Daily interest is a particular advantage to an individual who wishes to overpay, or make additional payments on their loan, as the balance reduces on the date the overpayment is made and therefore, this has the immediate effect of reducing the interest charged the following day. If the monthly payments are maintained at the same level, a larger proportion of capital will be repaid each month, which will have the effect of reducing the outstanding balance yet further.

Other points to consider

These are the most important factors to take into consideration when looking for a low rate loan. Of course the cost of a loan will vary depending on the type of loan taken (secured loans tend to have lower rates than unsecured loans, for example), how many years the repayments are over (longer term loans will have lower payments, but will probably cost more in total), APR and method of interest calculation. This guide is intended as a brief overview of the things to look out for when searching for low rate loans. If you are in any doubt regarding a loan, you should log on to one of the many price comparison websites for further information, or consult an independent broker who is able to advise in detail, not only the best type of loan to suit your own personal circumstances, but also on the most suitable provider for a low rate loan.