Not all loans are equal. We often end up paying over the odds for our borrowing. The Annual Percentage Rate, or APR, is the rate of interest, including additional charges, such as annual or arrangement fees, over one year for the amount borrowed.

If our lender charges two per cent per month, the APR is two multiplied by 12, (the months in a year), which means that we pay 24 per cent. Sounds fairly straightforward doesn’t it? However, it depends on whether the lender charges simple or compound interest.

Simple interest means that when we borrow, say, £1,000 at the headline two per cent today and repay it exactly one year on, we pay £240 in interest. However, if our lender charges compound interest the price goes up.

Take the same example, but apply compound interest charges and we end up paying the headline interest of two per cent which compounded is 26.82 per cent, making our £1,000 spend cost £1,268.20 in total.

Also, ‘APR' and ‘Typical APR’ can be different. Lenders calculate interest based on the risks involved, meaning that if they consider a customer at risk of non-repayment they will load the APR, which means that the customer pays more!

Golden rules of borrowing:

1. Borrow as little as possible.

2. Repay as quickly as possible.

3. Watch out for hidden fees, including early settlement charges.

4. Never miss payments; late fees are added to the outstanding balance.

5. After a credit card balance transfer, repay everything before the zero period expires.

6. Never withdraw cash on a credit card.

Stuck with an outstanding credit card balance?

It pays to shop around for a zero interest rate balance transfer deal. Santander and Barclaycard are currently offering 27 months and 20 months respectively; under no circumstances should you add new spends to this type of card.

Visit Money Saving Experts interest calculator: