What’s the Real Cost of a Loan?

What’s the Real Cost of a Loan?

Remind me – what’s a personal loan?

A ‘personal loan’ is money that is borrowed from either a bank, an online lender (such as Wonga), or a credit union that can be paid back either in a lump sum (all at once, paid back with interest and fees) or over an instalment period (typically a period of months or years, paid back with interest and fees).

Personal loans are ‘unsecured’ – meaning that, when taking one out, you do not need to lay down any assets as ‘collateral’ should you fail to make a repayment or fall into arrears.

Personal loans usually enable borrowers to use credit for any reason, though borrowers typically use this money to fund emergency expenses, manage their cash flow, or to fund a short-term expense (such as medical expenses or school fees).

Personal loans are usually more affordable to repay when compared to a credit card, and would often allow you to borrow larger sums of money. However, their Annual Percentage Rate (see below) is often higher – meaning that the penalties for falling behind your scheduled repayments or falling into arrears, can be far more costly.

Understanding your credit score

Your credit report is a running score of your credit-worthiness, where your borrowing behaviour (both how much you’ve borrowed in the past, and whether you’ve repaid your debt on schedule) is recorded. When you apply for a loan or credit card, a reputable lender will check your credit record (held by a credit bureau) to examine your past behaviour and will then make a decision as to whether they feel you’ll be able to repay any cash you’ll be able to borrow.

When you apply for credit, your applications will leave a ‘footprint’ in your credit report – this is essentially a mark to indicate to other lenders that, at a certain point in time, you have tried to borrow money. This can influence a lender’s decision to allow you to borrow cash.

When you do apply for a loan, your credit score can be influenced in a number of ways. Usually, once you have borrowed money and are in the process of repaying it, your credit score will decrease as a signal to other lenders that you have already incurred debt that you need to repay (meaning that, as a potential customer, they should avoid re-lending to you to prevent you from taking on more debt than you can afford to repay).

If you successfully repay your loan as per your promise date, your credit score can increase as a signal to other lenders that you are credit-worthy and that your financial habits are sound. By borrowing from Wonga and repaying your loan either on-time or ahead of schedule, you can improve your credit score.

What is interest, really?

Simply put, ‘interest’ is the cost of using someone else’s money.

Interest is usually calculated as a percentage of a loan or deposit balance that is regularly paid to a lender. When you lend money, you earn interest – and when you borrow money, you pay interest. This principle is used to ensure that the cost of lending money is always covered.

Interest is usually determined on a number of different factors – usually the interest rate, the original amount of the loan, and the amount of time it takes to repay debt are used to determine interest when borrowing money.

When you take out a loan, a reputable lender will show you not only the original amount of money that you have agreed to borrow and repay, but also how much interest you’ll need to pay as well. When you apply for a loan with Wonga, this total amount is shown upfront, so that you can make a decision as to whether you can afford to repay this amount.

It’s important to note that if you take out a loan and either fall behind on a repayment or fall into arrears, the interest rate you agreed on will either continue or increase depending on how long it takes you to fully repay your debt.

For example, if you take out a 2-month instalment loan and only fully repay on the 6th month, you will have to continue paying interest over the entire 6-month period; meaning that instead of repaying the entire sum you originally agreed to, you can end up paying far more. That’s why it’s important to always settle your debts on time, or as early as you can.

Remember that when borrowing from Wonga, you can always choose to repay earlier and save – meaning that if you fully repay your loan ahead of schedule, you can pay less interest.

What’s an Annual Percentage Rate?

When you take out a personal loan, you usually agree to repay over either a short-term period (usually up to 45 days) or over a period of months (where you would usually agree to repay in a fixed number of monthly instalments). In both cases, your interest rate will be partly determined by how long you take to repay your loan.

In the event that someone takes out a personal loan and fails to repay in the same year that they borrowed money, an Annual Percentage Rate comes into play. This is an annual rate that an online lender will charge to cover a yearly cost of funds for issuing a loan in the first instance.

Annual Percentage Rates for personal loans can be high, given that they are designed to ensure that lenders can reclaim their expenses should a borrower ultimately fail to make repayment or take an exceptionally long time to do so.

In these cases, it is always worthwhile to repay a personal loan as quickly as possible, to prevent the total amount that you need to repay from increasing year-on-year.

What fees can I be charged?

When taking out a personal loan, you can be expected to pay a number of fees that might add to the overall cost of the loan that you need to repay. These can include an initiation fee (the charge a lender might issue for signing you up as a new customer), a deposit (where you place a certain amount of money down as ‘collateral’ or ‘security’), or early repayment fees (where you can be charged a fee for changing your original repayment date).

When applying for a personal loan, it’s worthwhile to enquire about these fees so that you can fully calculate the total amount of money you’ll need to repay to a lender. Any reputable lender registered with the National Credit Regulator will tell you about these fees upfront.

If you borrow from Wonga, interest is charged per day, so the shorter your loan period the less you'll pay for your loan. We also have a service fee, as well as an initiation fee. Again, this is included in the total cost of your loan which you'll be shown upfront, even before applying. What’s even better is that we don’t charge any early repayment fees. We actively encourage you to repay your loan as early as possible, and we’ll charge less interest when you do so.