Short-term finance is quoted differently from a mortgage, and the difference catches people out. A rate that looks small is monthly, and the arrangement fee is often larger than the first several months of interest.
Comparing two offers on rate alone will usually pick the wrong one.
Add everything up over the actual term
The only fair comparison is total cost over the period you will really hold the facility. That means interest, arrangement fee, valuation, legal costs on both sides, and any exit fee.
A lower monthly rate with a larger arrangement fee is cheaper over eighteen months and more expensive over four. Neither is better in the abstract.
How the interest is handled changes what you pay
There are three common structures, and they are not equivalent.
- Serviced. You pay the interest monthly. Cheapest overall, but you need the cash flow to do it.
- Rolled up. Interest accrues and is settled at the end. Nothing to pay monthly, but you are paying interest on interest.
- Retained. The lender holds back the interest from the advance at the outset. Simple, but it reduces the money you actually receive, so the loan has to be bigger.
Watch the net advance
With a retained-interest facility, the figure that matters is what lands in your account, not the gross loan. If you need a specific sum to complete, work backwards from that — a gross facility of a given size will hand over noticeably less.
Early repayment
Ask what happens if the exit arrives sooner than planned. Some lenders charge a minimum term regardless; others charge only for the months used. On a short facility that difference is material, and it is the question people forget to ask.
This article explains how these products generally work. It is not advice, and it does not take account of your circumstances. Any figures are indicative market ranges at the time of writing rather than an offer. Speak to an adviser before acting on anything here.
