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What is APR? A guide to Annual Percentage Rate

You’ll no doubt have noticed banks and lenders advertising their APR, but what does APR mean 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 means the actual rate of interest you will pay on your loan.

If you’re looking at taking out a loan, credit card or mortgage, it’s more than likely you’ve come across APR. It’s worth considering when comparing different financial products on the market, to help you get the best interest rates available.

Understanding what APR means and how it works can help you make the right choices for your financial situation when borrowing money. Read on to find out more.

What does APR mean?

APR stands for Annual Percentage Rate, but what is Annual Percentage Rate? This is the yearly cost of borrowing you will repay when taking out a loan. The APR is usually written as a percentage of your loan amount. It includes any interest, charges and agreed fees, on top of the amount you borrow.

All banks and lenders must declare the APR upfront so you can compare financial products. The amount of APR charged may vary from lender to lender and affects the total amount you have to pay back.

How does APR work on a loan?

When you borrow money, you should expect to pay back the original amount borrowed, plus the interest. But there may also be other costs, such as an arrangement fee, set-up fee or other charges. This is where the APR can help, as it is designed to indicate the total cost of borrowing, including all these charges.

Bear in mind that you’ll face lower monthly repayments if you spread the cost over a longer period. But you’ll end up paying more in the long term.

How to calculate APR on a loan

The APR on loans is usually calculated for you by the lender. The percentage is calculated by:

  1. Adding together the interest amount and any compulsory fees or charges.
  2. Dividing this amount by the loan amount borrowed, then dividing again by the number of days in the loan term.
  3. This value is then multiplied by 365 (for days in a calendar year) to work out the annual rate, and then by 100 to convert it into a percentage.

So, what does APR mean on a loan? Let’s say you want to borrow £5,000 over two years at a 5% interest rate, with a £250 set-up fee. The APR would be 7.5%, including your interest rate and fees. You can then compare this amount to other loans to see which offers the best rate

What is representative APR?

Some loans are advertised with representative APR. But what does representative APR mean? This type of APR means that at least 51% of people who are accepted for the advertised loan should receive that rate or lower. However, up to 49% of people accepted for the loan may end up paying a different, higher rate than initially advertised.

While you may assume you will get the lowest rate with the lender offering representative APR, this isn’t always the case. At the time of application, there’s a chance you’ll be given a personal APR based on your unique financial situation. This could be the same or lower than the representative APR, but it could also be higher – so it’s worth bearing this in mind when weighing up your options.

What is personal APR?

Personal APR is an individual rate of interest based on personal circumstances. These can include your credit history and credit score, your current financial situation and income, and how much you need to borrow. This can be different to advertised representative APRs, and different lenders may offer different rates, so it can be worth shopping around to find out what the APR is for your circumstances.

What is APRC?

APRC is an acronym for Annual Percentage Rate of Charge. This is applied to secured loans such as mortgages and shows the annual cost for that loan over its lifetime. With APRC, all charges for the loan are brought together, including variable interest rates and fees. This allows you to compare the actual cost of a loan from various providers. So, what is a good APRC for a mortgage? As with APR, the lower the number, the less you will pay overall. However, with APRC, future interest rates are also accounted for. Most mortgage and secured loan providers will offer an introductory rate, which is often more attractive. This rate will typically rise after a certain number of years, depending on inflation and the company’s standard variable interest rate.

What is an exact APR?

With exact APR, you usually know the full sum of APR you’ll 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 what exact APR means, you’ll have a better idea of how repayments look in the long term.

What is a good APR for a loan?

For a good APR, lower is always better. A lower rate means you should be paying less, saving you more than with some of the higher rates on the market. However, it can depend on the type of loan. What is a good APR for a mortgage will not be the same as a good APR for a credit card.

Remember that the final cost of a loan depends on how much you want to borrow and how long you take to pay it back. The longer the term of your repayments, the more a loan usually costs 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 might have a higher chance of being offered better terms from your first choice of lender.

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

At Norton Finance, we can guide you towards financial products that meet your needs and help you make that final decision in choosing a loan that works best for you.

Visit Norton Finance to discover the best APR for your loan type and circumstances from a variety of lenders.


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