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A guide to APR

Any bank and lender that offers loans and other financial products must advertise their APR. But what is APR?

Any bank and lender that offers loans and other financial products must advertise their APR. But what is APR?

When you borrow money from banks or lenders, the final amount you pay back is determined by the APR. With many financial products on offer, you need to take into account that most loans cost a little more due to the APR, so you will typically end up paying back the amount you borrowed, plus the money accrued as APR. Understanding how the APR works will help you to make the best choice for you when it comes to borrowing money.

What is APR?

APR stands for Annual Percentage Rate, which is what lenders charge for a loan. It indicates the annual percentage you will be charged on the amount you borrow, and represents the interest rate, plus any arrangement fees. All banks and lenders have to declare their APR up front so you have the opportunity to compare financial products. The amount of APR charged will vary from lender to lender, and will affect the total amount you have to pay back.

How is APR calculated?

When you borrow money, you should expect to pay back the original amount loaned plus the interest. For example, if you were to borrow £1,000 with a 12% APR, after a year you would owe the original £1,000 plus £120 interest, a total of £1,120. On a monthly basis the APR would be 1%, so if you owe £1,000, you would be charged £10 interest a month. Bear in mind that the longer it takes you to pay off the loan, the more interest is added pm due to the effect of compound interest, although the monthly cost may be lower.

Typical or representative APR

The APR indicates the amount you will be charged for the money that you borrow, and should be clearly advertised by all banks and lenders with their financial products. However it is often advertised as a typical or representative APR, which then may not always be the rate that you get. The advertised APR is offered if the applicant meets certain criteria. A typical or representative APR means that at least 51% of people who are accepted for the advertised product will receive this rate, but the rest may end up paying a higher rate than advertised.

What is a good APR?

Any product that offers a low APR could be deemed as having a good APR, as the lower the APR, the less it will cost you. Consider though that what it finally costs you will all depend on how much you want to borrow, and how long you need to pay it back. The longer the term of repayments, the greater the amount of interest you will have to pay. It is useful to know your credit score, as a good score can improve your chances of being offered lower APR for your chosen financial product.

It is worth putting the effort into searching out a loan with lower APR, as it will help to make your repayments more manageable. Ideally you want your money to go towards paying off the loan, rather than being spent on interest due to a high APR. At Norton Finance, we can guide you towards financial products that meet your needs, and help you to make that final decision in choosing a loan that works best for you.


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