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APR Minimum Payment Danger

How the minimum payment can mean you pay the maximum price

As UK credit card debts soar, it is important to understand how Annual Percentage Rates (APRs) can affect how much you really owe, because your APR can disguise the danger of only making the minimum payments required.

Here are two important factors that will affect the cost of your repayments:

Interest Rate

The interest rate is the initial cost of borrowing. For example, if you borrow £1000 at 20% APR, to be paid over a year then expect, to pay £200 in interest. Clearly, the higher the APR the more you will end up paying back.

Timescale

The length of time you borrow for will affect the amount of interest you pay – the APR is exactly what it states and charges for each year you owe the debt. This means you’ll start paying interest on top of interest. Your minimum monthly payment will only go towards paying that month’s interest, rather than actually decreasing the amount you owe.

You therefore extend the time it will take to repay the debt.

For example, if you had a credit card debt totalling £3000 at 20% APR, and you only paid a minimum repayment of 2% or £5 each month (whichever is the the higher), it could take 52 years to pay off in full and cost £9,204 in interest!!

Can’t afford the Minimum Repayments?

If you’re struggling to make the minimum repayments towards your debts, then you can get free debt advice from Payplan online.

Written by on November 12th, 2009

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