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Understanding the total cost of borrowing

Taking out a loan can help you get to where you need to be. If it means getting a new car, funding a major life event, or even taking a holiday - sometimes, you just need a little extra. And while additional funds can be a big help, choosing who to borrow from and understanding what you are committing to is not always straight forward.

The key to comparing loan providers is to know the total cost of borrowing. Lenders will charge a range of fees and administrative charges in addition to the interest. Together, these costs equate to the full amount the lender will be paid for the loan - also known as the total cost of borrowing. If you understand the total cost of borrowing you will able to make a like for like comparison and an informed decision when choosing a loan provider. The Commerce Commission has a short, informative video on the subject called “Don’t get stung by your loan” which helps to explain the importance of the total cost of borrowing.

Interest rate vs total cost

Typically, borrowers look to the interest rate as an indicator of loan affordability. While this determines the total amount of interest that to be paid, it is only one of the variables that contributes to the total cost of the loan. In some cases, a loan with a lower interest rate can actually be more expensive than another with a higher interest rate. Knowing the total cost of borrowing is essential to be able to determine the loan that will cost the least.

Taking out a loan is a big decision. It is important to be informed and to understand what you are committing to. Our lending team at AA Money are here to help you on your journey. If you have any questions about the total cost of borrowing, or you’d like to apply for a loan you can contact us on 0800 500 555.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article. The links provided in this article are for convenience only; AA Finance Ltd. bears no responsibility for the accuracy, legality or content of the external sites or for that of subsequent links.

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