Lenders make their profit by charging you interest on the amount of money you borrow. By law they must express the interest charged as an Annual Percentage Rate (APR). This figure reflects the true cost of the loan and includes interest payments and any other fees.

The APR makes life easier for you when you are shopping around for a loan as it means you can effectively compare products. Watch out when only the monthly interest rate is advertised. This is not necessarily a reflection of the true cost of the loan as it does not take into account fees and other charges.

The rate of interest charged by a lender will vary according to their perception of risk. If they consider you to be a low risk (i.e. there is less chance that you will not repay the amount borrowed) then the rate of interest offered to you will be lower than if you were considered a high risk applicant. In assessing risk, a lender will consider factors such as your personal circumstances, credit history and, if trying to obtain a secure loan, the level of collateral offered.

As with mortgages, interest rates may be fixed for the term of the loan, or you may be offered a variable rate. If the rate is fixed, then it is easier for you to budget as you will repay the same amount each month. A fixed rate will protect you from rises in interest rates, but they will also prevent you from taking advantage if rates fall. By the same token, variable interest rates will make it harder to budget each month and your monthly repayments will rise and fall as interest rates change.