APR stands for Annual Percentage Rate. It is a term you will often see on a number of different loan products, including credit cards, mortgages and loans. By law, the APR is required to be displayed on any financial products which involve a loan element.
This is so the customer is able to compare products more easily and fairly when making a decision about which lender to go with.
To summarise, an APR tells you how much any given financial product will cost you over the term of the loan. It factors in the interest charged and how frequently the interest will be charged, as this affects the overall amount that you will be liable to repay.
It also takes into account additional costs, such as an annual fee on a credit card or a mortgage arrangement fee.
Credit providers have a standardised method of calculating an APR. This is based on an assumed borrowing level of £1200. This is why an APR can be a very useful way of quickly comparing a variety of financial products rather than looking simply at the rate of interest charged, as the APR makes for a level playing field.
However, it can in some cases be rather more accurate to compare the exact interest rates plus any other fees to work out exactly how much the product will cost you over time.
To put this into context, consider the APR on a credit card. These use the interest rate chargeable for purchases made on the card. However, the interest rates that is applicable to a cash withdrawal or a balance transfer may be set at a different level, so in this case it makes more sense to compare the interest rates (as opposed to the APR) if that is the way that you intend to use the card.
It is important to recognise that an APR has no bearing on whether or not a lender is likely to accept you. You should do as much preparation as you can before applying for any kind of loan to try to meet the criteria of acceptance of the lender.
Do some research — check the frequently asked questions section on their website and check the product summary box of your preferred provider to get an idea of whether your application is likely to be successful before you formally apply.
Many people are surprised to find out that there are in fact two different types of APR.
A personal APR really is self-explanatory — it is the percentage amount that you will be liable to pay. In the case of a mortgage, this will be the APR advertised with the product. You will either be accepted and pay this APR or you will be rejected. The rate doesn’t alter depending on your credit score, which it can do when you are applying for a loan or a credit card.
When a lender accepts you for a loan or a credit card, make sure that you always double-check the actual APR that you are being charged, as this could be substantially different from that quoted on generic advertising. The rate of interest on some forms of borrowing is decided on with reference to your financial status generally and your credit score.
So that the customer is able to compare the products before deciding, the provider is required by law to display a Representative APR. However, you won’t know what rate you will get until you are accepted. The Representative APR is the advertised rate that a minimum percentage of customers (currently 67%) will receive.
For secured loans, unsecured loans and personal loans (including bad credit loans), this Representative APR may well depend on the amount borrowed. Remember to check that the Representative APR is valid on the amount that you personally wish to borrow, as you may find yourself out of pocket unnecessarily if it isn’t.