Confused By APR?
Let's Get Technical
If you do any banking whatsoever - and at some point we all do - then we have all heard about APRs. Annual Percentage Rates - or APRs - are components of credit loans of all types whether they are mortgage loans, personal loans, credit cards, or other types of credit agreements. When you take out a loan you are charged interest on it that is paid over the life of the loan. APR actually describes what the true cost of borrowing money is over the course of a year. It includes the interest rate you pay on your loan as well as how you pay back the loan, how much the repayments are, the length of repayment, additional charges and fees and PPI premiums.
In its most basic definition, APR measures how much a loan or other line of credit costs you in interest over one year, and it is expressed as a percentage of the total amount of money that you borrow. How do you figure out the APR? Take the amount of your loan and how much interest you will be charged over one year and divide that interest amount by the amount of your loan. Multiply the number by 100 and you get your APR. For example, you borrow £1,000 and are charged £80 in interest for that year. The APR is calculated like this:
80/1000 x 100 = 0.08 x 100 = 8%
Normally you know what the APR is before you know how much the interest you will be charged is, so you can determine how much your interest over the course of a year is by using this formula:
1000 x 8% = 80
Thanks to the Consumer Credit Act 1974, lenders are required to include the APR in all credit agreements. They must display their 'typical' APR in their advertisements and the APR can vary from lender to lender as well as across the different products they offer. Credit card companies, banks, and other lending institutions are required by United Kingdom law to clearly illustrate their own APR rates. From there, you can compare one APR to another to get the best rate. Remember, however, that there are additional charges that may not be included in the APR that the lenders advertise, so shopping around for the best and most competitive deal is advisable if you are going for a line of credit.
You also need to remember that lenders can advertise their current APR in monthly terms instead of in annual terms. This is why you see APRs for as low as 2% per month. When you apply for a line of credit, the lender must tell you what the actual APR is. So if the monthly APR is 2%, the annual APR equals 24%. Not everyone will qualify for the 'typical' APR that lenders advertise. The actual APR you are charged is determined by your credit history, income, and other criteria the lender applies.
When you are going for a line of credit you should always ask your potential lender what fees or other charges are included in the APR. Once you have this information, you will be able to make competitive comparisons on all of the offers that are available and choose the best line of credit for your needs.