Do your homework

Providing you do it smartly, borrowing money can make achieving your goals financially possible.

However, fail to do your homework and it could end up being more of burden than you bargained for.

So no matter why you need the money or what your financial circumstances are, it makes sense to research your options and make an informed decision about the best option available to you.

How do you find the cheapest option?

When comparing your options it is a good idea to look at the total you will have to pay out once interest and charges are factored into the equation.

Here are the most common reasons for needing to borrow money and the cheapest ways to go about doing it so you do not end up paying through the nose.

Check the APR

An APR stands for Annual Percentage Rate and illustrates how much your credit card, loan, or other form of credit will cost per year.

The APR figure will take into account all fees and charges over the year, so it is a good guideline for exactly how much your loan, credit card, or other form of borrowing will cost.

What is typical APR?

While an APR advertised on any line of credit would give you a good idea of how much the borrowing would cost, the issue occurs because most lenders do not simply advertise an APR, but rather a 'typical' APR.

This means the APR you will be offered if you applied for the credit card or loan may not in fact be the same as the rate advertised.

This is because many lenders operate on what is known as risk-based pricing.

Did you know

As a borrower your degree of risk is determined by your credit history and past credit behaviour.

This means that the APR you will be offered in reality on your borrowing is dependent on a number of factors; the foremost being how high-risk a borrower you are perceived to be.

If your lender perceives you to be a high-risk borrower it is likely that you will be offered a higher APR (or even refused credit altogether).

If an APR is advertised as 'typical' it means that the lender must, by law, offer this rate to a minimum of 2 out of every 3 borrowers who apply for the credit.

This means that 66% of all applicants must receive this rate for it to be classed as typical, so take it with a pinch of salt; what you are ultimately offered may in fact be significantly higher.