The Golden Rule of Comparison
The golden rule of comparing credit products is simple: Only compare APR with APR, over the same loan term, for the same loan amount.
If you compare a 3-year loan at 5% APR with a 5-year loan at 5% APR, the APRs are identical, but the 5-year loan will cost you significantly more in total interest because you are borrowing the money for longer.
Why the Lowest APR Isn't Always the Cheapest
This is the most counter-intuitive part of borrowing: the product with the lowest APR is not automatically the cheapest option in total cash terms. The loan term dictates the final cost.
| Loan Option (£10,000) | Monthly Payment | Total Interest Paid |
|---|---|---|
| Option A: 8.0% APR over 2 years | £452.27 | £854.48 |
| Option B: 5.0% APR over 5 years | £188.71 | £1,322.60 |
Option B has a much lower APR (5% vs 8%) and a much lower monthly payment (£188 vs £452). Most consumers would choose Option B. However, because you are borrowing the money for an extra three years, Option B actually costs you nearly £500 more in total interest.
When comparing products, use APR to find the best rate, but always check the Total Amount Payable to understand the true cash cost.
Hidden Costs APR Doesn't Show
While APR is excellent for comparing standard costs, it does not capture penalty fees. When comparing products, you must also check the small print for:
- Early repayment charges: Will you be penalised if you pay the loan off early?
- Late payment fees: How much are you charged if you miss a payment date?
- Over-limit fees: What happens if you exceed your credit card limit?