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A guide to APR

You’ll no doubt have noticed banks and lenders advertising their APR, but what is APR and how does it affect you when taking out a loan?

When you borrow any sum of money from a bank or lender, the APR indicates the actual rate of interest you will pay.

There’s a lot of financial products on the market, and it’s important to be aware that the interest rate on loans can vary tremendously, so it is important to compare the cost of the product to ensure you are getting the best interest rate available by comparing the APR of each loan. Understanding how the APR works will help you make the best choices for your financial situation when borrowing money.

What is APR?

APR stands for Annual Percentage Rate, which is the interest rate you will pay when taking out a loan. The APR indicates the annual percentage you will have to repay including all costs, charges and agreed fees as well as the amount you borrow.

All banks and lenders must declare APR up front so you can 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 does APR work?

When you borrow money, you should expect to pay back the original amount borrowed plus the interest, but also there may be other costs such as an arrangement fee, set up fee plus other charges, therefore the APR is designed to indicate the total cost of borrowing including all other costs.

Bear in mind that, although monthly repayments may be lower the longer you agree to take to pay off a loan, the more you’ll end up paying in the long term.

What does representative APR mean?

Some loans are advertised with representative APR. This means that at least 51% of people who are accepted for the advertised loan will receive that rate. The other 49%, however, may end up paying a different, higher rate than initially advertised.

While it may be assumed you will get the lowest rate with the lender offering representative APR, this isn’t always the case. At time of application, there’s a chance you’ll be given a personal APR based on your unique financial situation. While there is a chance it could be the same or even lower than the 51%, it could actually be higher.

What is an exact APR?

With exact APR, you will know the full sum of APR you will need to pay from the moment you see it advertised. In some cases, this could mean you’ll be paying more than the advertised rates on other loan products. On the other hand, because of how exact APR works, you’ll have a better idea of how repayments look in the long term.

What is a good APR?

In this case, lower means better because you will ultimately be paying less, saving you more than with higher APRs on the market.

It is important to consider what a loan will finally cost depends on how much you want to borrow overall, and how long you need to pay it all back in full. The longer the terms of your repayments, the more a loan will cost overall due to the additional repayments. Knowing your credit score can be useful here, especially if it’s good. If your credit score is healthy, you’ll have a better chance of being offered better terms from your first choice of lender.

It is worth scouring the market to find a loan with a lower APR, as it will likely help to make your repayments over time more manageable. Ideally you want your money to go towards paying off the loan, rather than being spent on interest.

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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