Borrowing has become an everyday part of our business and personal lives.
If you buy with cash, you are often able to negotiate until you recognize a good deal. How can you tell whether you are getting such a good deal with borrowed money?
Money, money, money
We all borrow money at some time or other in our business and personal lives. The lending comes in a variety of guises – credit cards, overdrafts, mortgages, loans etc. What’s strange is the fact that most people don’t see it as buying money, which is of course, what it is. If you spend money on other purchases, you normally attach a degree of care in getting a good deal. But this seldom happens when you secure a loan or sign up for a new credit card. Why? Probably because it’s shrouded in financial mystery – created by the lenders who might not want you to know how much it really costs to buy their money. So, what can you do to ascertain the real position?
Cost of money
The price you pay to borrow the money is known as the interest rate. No great surprises here! However, the rate varies considerably even though most are founded on the Central Bank’s base rate (you can find it in the financial pages of the daily papers). The actual rate you pay can be calculated in several ways. The norm for mortgages, for example, is to calculate the interest annually as a percentage of the outstanding capital balance. In a nutshell, rates on mortgages, personal loans, credit cards and savings accounts will all have been linked with base rates (whether directly or indirectly).
What is the rate?
The annual percentage rate (APR) is vital in explaining the rate that you’ll end up paying. Often, it’s hidden away amongst the small print with the lender preferring to quote a monthly rate of e.g. 2%.
Tip. Always insist on seeing the APR (this is your legal right) as it’s the only way to compare all the deals. If the lender proves to be difficult over this, simply walk away.
Here, knowing the APR is crucial. Typically, you’ll be charged interest on a monthly basis. The rate is normally somewhere in the 1-2% range. Sounds attractive? Of course, it does. But this equates with 12-24% pa (this is the APR). You can see from this ploy that 1% does not sound much better than 1.5% on a monthly basis. But annually it represents a difference in APR of 6% (18% – 12%). See how the little numbers really add up?
Cards not so cheap. Credit cards might be convenient. But they’re certainly not the cheapest way to borrow money. The typical APR can sometimes be three times or more that of the current bank base rate. The trick of paying off your outstanding card balance before any interest is accrued is certainly good practice.
Beware. Some card issuers start charging from the point of sale. The better deal is based on being charged from the statement date – which can be up to 31 days after the purchase. Careful planning can result in getting a maximum of 56 days of interest-free credit. This is because most card issuers usually allow 25 days for payment to be made following the statement being issued.
Borrowing has become an everyday part of our business and personal lives. If you buy with cash, you are often able to negotiate until you recognise a good deal. How can you tell whether you are getting such a good deal with borrowed money?
Tip. Check the basis on which your card issuer calculates interest. If it’s from the date of purchase, change to another card (assuming the all-important APR is at least as competitive).
Do not be taken in by the attractive advertising offering monthly rates as low as 1%. Check how the annual percentage rate (APR) of each lender compares for the true “cost of borrowing” figure. With credit cards make sure interest is not charged from the date of purchase.