When it comes to credit, APR is really important. From what it stands for to how it works, we’ve explained everything you need to know.
If you’re scratching your head over APR and what it actually means for you, look no further.
What is APR and what does it stand for?
APR stands for Annual Percentage Rate and, put simply, it’s how much it costs you to borrow money over a year - you’ll see the APR figure on loans and credit cards to help you compare deals easily.
More often than not, the APR is also referred to as the interest rate. While they can be used to mean the same thing, the APR can include other costs, like broker or arrangement fees (if it’s a loan).
What’s an example of APR?
So, let’s imagine you’re borrowing money with an APR of 10%. If the amount was £1,000, you’d pay an extra £100 over the course of one year. If you repaid it in 6 months instead, you’d pay about* half of that (£50). The sooner you repay your debt, the less interest you’ll pay.
What about representative APR?
Representative APR is the rate you’re likely to receive when you apply for a product. It’s called ‘representative’ because, even though you’ll see it advertised on the offer, that rate isn't actually offered to all customers - it's what the lender expects at least 51% of customers to receive.
This means that, once you’ve applied, you could be offered either a cheaper or more expensive deal than you saw on the original offer. The rate you actually get could be determined by a number of things, like your credit score.
How does APR work exactly?
Got a loan? The APR will be a fixed cost that’ll be bundled into your monthly repayments. If you choose to pay off the loan early, you could be asked to cough up an early repayment fee - as lenders will want you to make up for making fewer interest payments.
A credit card, on the other hand, is a different story. Because the amount you spend and repay each month can vary, the amount of interest you pay will vary, too. The bigger your balance, the more interest you’ll need to pay.
To work out an estimate of your monthly interest payment, your current credit card balance will be multiplied by the APR, then multiped by the days in the month, and THEN divided by 365 (the number of days in a year).
Phew! Here’s a handy calculation to help you remember:
The lower the APR, the better
It may go without saying, but the lower the APR, the cheaper it’ll be for you to borrow the money. The cheapest rates are typically saved for people who have good credit scores - so if your score is a little worse for wear, it could pay to see if you can improve it before you start looking for deals.
You can choose to pay less interest (or none at all)
In an ideal world, it’d be best to steer clear from products with a higher APR. However, if you are considering getting a credit card that has a high APR - like a credit builder card or a bad credit credit card - that doesn’t mean to say you’ll have to pay the costly fees.
By choosing to repay your balance in full every month, you needn’t pay a penny in interest. Not only can this help you spread the cost of purchases for free, but it’s also a great way of improving your credit score.
How to get accepted for low APR deals
To get your hands on the best APR deals, you’ll need to have a decent credit score and a good track record of borrowing. It can take time to get there, but following these steps should help:
Use a credit builder card and pay off your balance in full every month
Always make all of your existing payments, like utilities and council tax, on time
See if you’re eligible before you apply for credit and keep applications low