Working out a repayment plan for your borrowing

It’s crucial to work out the total cost of the credit you’re taking out, including interest payments, and not just the amount you’re borrowing or how much you can afford to pay every month. Taking the time to work out the full cost of any borrowing lets you plan your finances and ensure that you really can afford it.

What affects your borrowing costs

How much you’ll pay to borrow money depends on how much you need and how quickly you plan to repay it. For example, if you want to borrow a small amount over a short period of time with a low interest rate, you may well pay very little interest (or none at all if you use a credit card charging 0% interest). On the other hand, borrowing a large amount of money over a long time will cost you more.

In general, use the APR to compare products. The lower the APR the better, but also look at how much it will cost overall. This will usually be more for a longer-term loan even if the APR is less, and will show as the total amount payable.

Borrowing options

Let’s look at an example. John needs to borrow £1,000 to replace his old boiler. He gets a quote from a big energy company for the boiler and the installation, including paying back the cost over two years. However, when he reads the contract he notices that if he takes out their credit for two years he will pay more than £300 in interest.

John looks around at other options. As he has a good credit rating, he considers:

  • Taking out a credit card with an introductory interest-free period of 15 months on new purchases, or
  • Applying for a personal loan with an interest rate of 10% that he can pay back over two years

This is how much John may have to repay each month and overall:

Option Interest rate Monthly repayment Total amount repayable
Credit card over 15 months 0% £66.67 £1,000
Personal loan over two years 10% £46.14 £1,107 (£1,000 borrowed + £107 interest)
Energy company credit agreement over two years 30% £55.91 £1,342 (£1,000 borrowed + £342 interest)

In the end, John takes a look at his monthly budget and decides that he can afford to take out the credit card and pay the extra £10.76 each month to avoid having to pay any interest. It means he will have paid off the balance in 15 months and he won’t have been charged interest. John will only save money because he knows he can make the payments within the 15 months. If you don’t think you would be able to do that, a credit card could cost you more.

What this table shows is the difference in repayment plans over different periods of time and how being able to pay a little more each month may mean you’re able to take out a much cheaper form of credit. It also highlights the importance of shopping around for credit and not just taking the first product you are offered.

Always spend some time shopping around for credit. Use comparison websites to look at different deals.

Be aware of any extra charges or fees. All loans should tell you how much you will pay back overall, including any interest.

Regular versus flexible payments

A loan agreement will have an amount you have to pay back every month. It may charge an early repayment fee if you do clear it ahead of time. Repaying your loan early at any time, in full or part, can be a good way of minimising cost.

If you took the loan out before 1 February 2011, the most you can be charged is two months’ interest. If you took the loan out after 1 February 2011, by law no fee can be charged for early repayment. That is unless the amount repaid early exceeds £8000. Even then, the amount is capped. You can ask the lender for a ‘settlement statement’ showing how much you will save by repaying early.

Other forms of borrowing such as overdrafts and credit cards are more flexible with low or no minimum repayment. But the interest rates on these tend to be higher and some overdrafts charge an initial arrangement fee.

Pros of regular repayments

  • Repaying a regular fixed amount may help you budget.
  • You know exactly when you will have cleared the debt.
  • You should be able to repay your loan early with no penalty (or early repayment charge) as long as you overpay less than £8,000 in a year (unless you took it out before 1st February 2011, when a penalty of – typically – two months’ interest may apply).


  • Regular payments may make it harder to budget if your income fluctuates.

Calculating the cost of borrowing

You can work out how much it will cost you to borrow if you take out a loan or a credit card using the information that lenders have to give you.

By law, when you apply they must tell you:

  • The interest rate, any fees or charges and the APR
  • How much you’ll have to repay in total
  • How much you will have to pay every month

You should find this information on the credit card or loan company’s website. It must also be in the pre-contract credit information form (the SECCI). If it is not on the website, the firm will need to send it to you before you enter into the agreement and explain key elements of the agreement.

In the case of credit cards, this will be based on certain assumptions about how you’ll use the card.

You can also use an online calculator to work out the true cost of any borrowing – and it will only take a few minutes.

Make sure you keep up with your repayments

If you miss any repayments you could be hit by fees and additional charges. It could also harm your credit rating because lenders look at how you’ve managed your existing credit when working out whether or not to lend you money.

Make sure there is enough money in your bank/building society account each month to cover your repayments and set up a regular standing order (for a fixed amount) or Direct Debit (if the payments vary) so you don’t miss a payment.

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