APR - What does it really mean?
If you are taking out any form of credit, whether you are applying for a credit card or getting a mortgage, the first thing you will look at is the APR of the loan. What does APR really mean? And does it give a true reflection of the cost of the loan? We provide some answers.
APR stands for annual percentage rate, and under the Consumer Act 1974 it is required to be published for all regulated loans so consumers can quickly and easily compare products. When advertising any form of credit, the lender must ensure that the APR is more prominent than any other rate.
APR was introduced because the interest rate a lender charges for credit will not accurately reflect the cost to the borrower. There are a number of reasons for this. On top of the interest rate, there are other costs to consider such as administration costs, acceptance fees, broker fees and so on. It would be next to impossible for consumers to compare all these costs for every loan. Because an APR takes in all of these extra costs, it will always be higher than the lender’s actual interest rate.
Another factor that affects the true cost of a loan is how the lender charges the interest and the time of repayment. These can vary and can affect the cost of the loan significantly. Again, APR means that consumers do not have to worry about comparing these factors. The Total Charge for Credit Regulations specify exactly how lenders should calculate APR, so there is no discrepancy between them. The mathematical formula for calculating APR is very complex and beyond the scope of this article.
It is important to bear in mind that unless the loan is fixed, there is no guarantee that the APR won’t change during the duration of the loan payday loans. For example, if the Bank of England raises its interest rates, the APR on your credit card will also go up. On the other hand, you will benefit if the Bank cuts its rates. If you have a fixed rate loan or mortgage, the APR cannot change during the fixed period.
In an ideal world, when shopping for credit we could check out a few lenders’ websites, find the product with the lowest APR and be safe in the knowledge that this is the cheapest product. Unfortunately, it is not that simple. While APR certainly makes it easier to compare products, consumers are still required to do a bit of digging to find the best deals.
One of the most common pitfalls on loans, mortgages and credit cards is low introductory rates. These are always attractive, always deceiving and never reflect the true cost of the loan, so be wary of these.
Many loans, especially larger loans like mortgages, remortgages and secured loans can have expensive set up fees, sometimes as much as £1,000, that will not be written into the APR.
Also, any form of credit you look at on today’s market will come with its own set of restrictions, fees, charges and penalties. These vary from product to product and it is too complex an area to get into here. However, as a general rule, if you keep up with repayments and settle the loan in the agreed term these will not be a factor. However, if you miss repayments, want to settle early, or deviate in any way from the original agreement it could end up being very expensive.
When looking for any loan, comparing the APRs of the different products is an excellent place to start. However, be sure to read the small print as the lowest APR may not be the best deal.