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Nearly a third of borrowers fail to take APRs into account when choosing a loan

A recent survey commissioned by Alliance & Leicester revealed that nearly a third of borrowers fail to take APRs into account when choosing a loan. Most said this was because all providers offer similar rates, while nearly a fifth confessed they did not understand how APRs worked.

The annual percentage rate (APR) should be the most important indicator when choosing any loan and borrowers who fail to take the loan APR into consideration will end up missing out on the best deals and will be paying unneccesarily high interest costs. There is a huge disparity in loan rates with some lenders quoting an APR of 5.9 per cent on a £7,500 loan (repaid over five years), others quote 11.9 per cent, more than twice as much. The difference between the two rates is worth an extra £1,000 in interest payments.

The Bank of England's base rate may be rising, but personal loans are cheaper than ever. Over the past few months, a price war has broken out on the high street with banks and building societies reducing interest rates for personal loans. Alliance & Leicester, Cahoot, Cheltenham & Gloucester, Northern Rock, Sainsbury's Bank, Tesco and Virgin Money have all reduced their rates in recent months with annual percentage rates (APRs) as low as 5.9 per cent now on offer.

However the lowest rates will not be offered to all applicants. Many of lenders offering the lowest rates use "risk-based pricing", which means they tailor the rates to an individual's credit history. Many individuals will not qualify for the best rates, and will be offered a more expensive deal. Borrowers with less than perfect credit histories may do better to opt for a lender which, while charging a slightly higher APR, does not operate risk-based pricing. These lenders include Barclays, Egg, First Direct, HSBC, Halifax, Nationwide Building Society, Sainsbury's Bank and Tesco.