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What is APR?

coins What is APR?APR is the abbreviation for ‘Annual Percentage Rate’ and it’s used as a way to allow people to compare the cost of different loans on a like-for-like basis. It shows the true cost of the money borrowed and reflects this as an annual rate – ie how much you’ll pay per calendar year. All lenders use the same formula to calculate APR and this allows customers to make a direct cost comparison between different lending products.

The term APR has a legal significance. It is calculated using a complex formula that is prescribed by the Consumer Credit Act (1974).

The APR calculation needs to include all the costs of borrowing, this includes:-

  • The interest rate
  • When it’s charged (daily, weekly, monthly or yearly)
  • Initial documentation fees (as some lenders charge a set-up fee when a loan is arranged)
  • Any other costs applicable to the loan (including fees a broker may have charged)

An APR is important because it prevents lenders from hiding any additional costs and ensures you get a true cost of the borrowing when considering a product.  For the purposes of comparison, lenders need to show a Representative Example:

This provides information on how much you can expect to repay if you borrow a certain amount over a particular period of time. The Representative APR is the APR that the lender expects at least  50% of customers to receive.

Take care when looking at borrowing money and always make sure you can afford the repayments.  And be sure that you do not confuse the interest rate on one product with the APR of another. If you are quoted a figure over the phone, be sure to confirm that you are being given the APR and not just the interest rate. The APR will always be higher.

The APR should not include any non-standard costs, like fees that would not arise if you have made all your payments on time and in accordance with the agreement, so late payment fees are not taken into account. The lender should make clear any non-standard costs and you should check these yourself to ensure that you are comfortable with these. Similarly, any early settlement charges will not be included in the APR calculation.