The cost of borrowing money is one of the most important things to consider, before applying for short term loans.
Interest rates affect the overall cost of your loan. There are also fees and charges that you might need to pay.
All the costs associated with borrowing go into a single figure, known as the APR.
The Money Shop APR shows how much it costs to borrow from this lender over a full 12-month term.
Instalment loans and short term loans often have a relatively high APR. When compared to traditional bank loans, they can seem expensive.
A loan’s APR is useful for a like-for-like comparison. But, it is often inaccurate for short term loans.
How The Money Shop APR is calculated
A loan’s APR is its Annual Percentage Rate.
The calculation includes fees and charges, as well as the interest rate.
Lenders must tell you a loan’s APR before you sign the agreement.
Instalment loans from The Money Shop have a representative APR of 450%. This is a monthly interest rate (with fees included) of just over 15%.
Problems with APR calculations
The Financial Conduct Authority strictly regulates the short term loans industry.
There are many price caps in place to help protect consumers.
Daily interest is normally capped at 0.8% per day, meaning 80p per £100 borrowed.
Also, you will not pay back more than double your original loan amount.
This means that APRs are often a poor barometer when calculating the cost of borrowing.
Short term loans often have high-interest rates. But, they are not intended for such prolonged borrowing.
Alternatives to The Money Shop
The APR becomes a useful figure during use for loan price comparison.
It can help you to quickly compare loans from a few different providers.
MYJAR is one of The Money Shop’s closest competitors. It, too, offers loans over terms of between 3 and 12 months.
MYJAR publishes a representative APR of 788%.
Lending Stream is another alternative, with an APR of 585%. However, their loans are only for 6-month terms.
Loan reviews for The Money Shop sometimes mention that the lender offers the “best APR for this type of loan”. But, it is important not to compare long-term borrowing with short-term.
Representative APRs are only completely accurate when the loan terms and amounts are the same.
The figures that lenders publish are representative. This does not mean that this is the APR that you will receive.
In order to, be representative, the published APR must be achieved at least 51% of consumers.
Many people do not receive the representative APR.
Interest rates are often different from one borrower to the next. They take into account an individual’s credit history and risk level.
Up to 49% of people may experience charges a different level of interest. Often, this is higher.
Some people may not receive approval for a loan at any interest rate.
The Money Shop instalment loan alternatives
For the lowest APR, there are other ways to borrow from The Money Shop.
If you can secure a guarantor loan, the representative APR is 49.7%. This is the cheapest way to borrow from The Money Shop.
Guarantor loans have lower interest rates because your guarantor expects to pay if you cannot keep up with your repayments.
If you have someone suitable to back your loan, with a good credit history of their own, then this may be a better way to borrow.
You can also use pawnbroking services, as a form of a secured loan. These are usually offered over 7-month terms, with a representative APR of 148%.
Lenders can lower their interest rates if the level of risk decreases. Interest rates are often better for people with higher credit scores, or with a loan backed by another person or a belonging.
Repaying a loan from The Money Shop
Interest is added by the day. It does not begin to accumulate until the money arrives in your bank account.
You will need to repay your loan in instalments. You will have reviewed the instalment amounts, and dates before you signed your loan agreement.
The Money Shop’s daily interest rate will be anything between 0.36% and 0.64%. This is below the FCA’s price cap of 0.8%.
If you repay your loan early, you will only pay interest for the days that you have been borrowing. This means that your loan will cost less.
Interest rates are lower if you borrow over a longer period of time. But, the overall cost will increase because interest is mounting by the day.
For shorter loan terms, interest rates are higher but your debt will be paid off more quickly.
A longer loan term can make your loan more affordable. You are spreading the repayments, which means that you will need to pay a smaller amount each month. However, you would pay less borrowing £500 for 6 months than you would pay if you borrowed for 12 months.
The Money Shop APR summary
The APR is the annual cost of a loan, taking into account the interest rate, fees and charges.
APRs are not always a useful way to check the cost of a short-term loan. This is because they scale these loans up to unrealistic term lengths.
However, an APR is useful when comparing two identical loans. It can show which is more expensive overall.
Each lender will publish their own representative APR. This is a figure that at least 51% of borrowers must meet.
Not everyone will receive the representative APR. Some customers will pay more. Others might pay less.
The Money Shop publishes a representative APR of 450%. Its pawnbroking services have a representative APR of 148%. Guarantor loans have a published APR of 49.7%.
For comparison, one of The Money Shop’s main competitors is MYJAR. Their published APR is 788% representative.
When you borrow from The Money Shop, interest is added daily. You may be able to reduce the cost of your loan by repaying your debt ahead of schedule.
Did you find this useful? Read the next chapter and please remember to share.