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Learn What APR Is And How It Works

What is APR?

Today the experts at Everyday Loans are helping explain APR. We’re going to dig into how Annual Percentage Rates work, why they are important and how they affect borrowers.

APR is a vital component of the loan application process. It’s key to understanding how your repayments and agreement with a lender will work, making it a great subject for us to cover in the Everyday Loans blog section in a little more detail. So, let’s get right to it!

What is APR? As we’ve mentioned already, APR stands for Annual Percentage Rate. The short explanation is that APR refers to the entire cost of borrowing money for one year.

APR is very useful because it’s a quick, easily understood figure that reflects the entire cost you’ll pay over one year for a given loan. Lenders are required by law to clearly show their APR during an application process and offer for a loan. If you are working with a lender that is not clearly providing their APR, this could be a red flag . It’s also a great way to quickly get a sense of the cost of repayments associated with a loan.

Let’s crunch a few hypothetical numbers to provide an example. If you are borrowing £10000 over 3 years, you’ll have an APR figure to look at before you accept the terms of the loan. Let’s say that APR is 5.5 % (compounding yearly). Over the course of thirty-six repayments – one per month for three years, you would be paying a total of £848.79 in interest, with each monthly payment being £301.

Fixed amounts

One of the benefits of APR in terms of understanding a loan is that it is fixed at the agreed-upon amount when your loan was offered to you (unless you are on a variable APR loan). This means your repayments on a loan will remain the same each month, giving you a consistent amount to repay that won’t be affected by fluctuations in things like inflation, interest rates, and bank rates. Once you understand the APR figure and what it means for your repayments on your loan, you don’t have to worry about relearning it every month to help with your budgeting.

As a general rule, when you begin to pay off a loan, you will be paying mostly interest. The more payments you make, the larger percentage of each payment is going toward the principal of your loan. This won’t affect your APR, though; you’ll still be repaying at the same APR figure you were offered at the start of your loan when you applied.

What’s representative APR?

While APR is a figure used to help you understand your loan, you’ll often see a different version of APR used when lenders are advertising their services to you. This is called the representative APR.

Rep APR is a slightly different figure and it’s valuable to know the difference between it and normal APR. The main giveaway is in the name itself: representative. A representative APR amount is one that is guaranteed to be offered to at least 51% of other customers who apply with that lender. That means it is a good indication of the APR you are likely to be offered if you are approved for a loan. As you can imagine, this is intended to help applicants for a loan to understand quickly what the average ballpark for APR on a loan is.

It’s important to keep in mind, however, that not everyone who applies within that group of 51% will be guaranteed to receive the same rate. Representative APR is just an average. You might also personally receive a final APR figure that is higher or lower than the representative APR amount you initially received from a lender.
The reason lenders use representative APR in the first place is so they can help people understand the costs behind a loan. Otherwise, lenders would not be able to provide any numbers on their products for consumers to compare.

Is a personal APR different? You might sometimes see personal APR appear in literature and advertisements around loans. There’s nothing too tricky here; it simply refers to the actual rate that you as a borrower will receive. Personal APR is a figure that is arrived at by a lender once they have calculated and appraised your loan based on your personal circumstances, meaning that it’s a reflection of the different metrics and data points a lender will use to appraise your application.

Your personal APR is unique to you and can be affected by common metrics such as your credit rating. The algorithms and calculations lenders use to arrive at a decision and a personal APR for your loan are quite complex, making it an accurate reflection of your circumstances and the preferences of the lender as a business.

It’s good to keep in mind that you might not actually know what your personal APR is specifically until after you have made your loan application. This is because lenders may not have enough information without the application to calculate personal APR. It’s also important to be aware that, for some lenders, applying for a loan can impact your credit rating. Everyday Loans is not one of these lenders as we use Soft Search technology. In some other cases, applying for a loan will be recorded on your credit file, which is why it can affect your credit rating – especially if you apply for a large number of loans from different lenders in a short space of time.

And that’s all there is to it! APR: It’s important to know about when you’re considering taking a personal loan. The Everyday Loans team put this article together with an eye towards breaking down the fundamental aspects of APR in loans and we hope we’ve succeeded in explaining the key points for your benefit.

A little understanding goes a long way in achieving an even greater degree of financial knowledge and we sincerely wish you the best for the future.

If you are interested in applying for a personal loan, we may be able to help. Please visit our website’s front page for more information. See you next time and take care!

Posted in Personal Loans on Mar 22, 2022.

Representative Example: Borrowing £3,000 over 24 months at an interest rate of 71.3% p.a. (fixed), you will repay 24 monthly payments of £238 per month. Interest Payable £2,706. Total Repayable £5,706. Representative 99.9% APR.

Jason Bovington - COO

Jason BovingtonJason became Chief Operating Officer in July 2022. He joined Everyday Loans initially in 2006 as part of the start up team implementing the credit risk strategy and building the analytical capability as Head of Credit Risk and Analytics. In his time with Everyday Loans he has also held the roles of Chief Risk Officer and Chief Credit Officer. Prior to joining Everyday Loans Jason spent 10 years at HFC Bank with his last role there being Credit Risk Director and prior to that he was part of the Credit Risk team at Lloyds TSB.