APR – three little letters that have a big bearing when it comes to borrowing.
That’s because when you borrow money, it comes with a price tag – think of APR as that price tag.
APR is the interest rate of a particular financial product - credit card, loan, overdraft, mortgage, whatever it may be. APR is the price tag.
When you’re researching products, APR may be followed by words such as ‘variable’ and ‘representative’ and in this blog, we’ll explain what APR is and what these terms mean.
What is APR?
APR stands for Annual Percentage Rate. It is a measure that lenders use for calculating and displaying the interest on products to prospective borrowers.
It is the rate you’ll pay for borrowing money over the course of a one-year period. The APR is not just the interest on your borrowing, but any other charges for that year (like an arrangement fee, for example).
With all lenders using the same metric, it makes it more transparent and easy for borrowers to be able to compare different products within the market.
Representative and variable
It wouldn’t be foolish to think that if a rate of interest is advertised, this is the rate of interest you’ll receive.
However, if it is ‘variable’ or ‘representative’ you’ll need to be careful, as what you see may not be what you get. First, we’ll look at representative APR.
If a product states ‘Representative APR’, this is the rate that lenders offer to the majority of customers (normally 51%).
If you have a poor credit history though, for example, a lender may not be able to offer you the product at that APR. They may either simply refuse your application, or offer you the product but at a higher APR.
You will also need to take care if you see a product with ‘variable APR’.
This means that the APR can go up and down throughout the course of your agreement. So if you want to know upfront exactly what you’ll repay, a variable APR rate probably isn’t for you.
Let’s be clear
We hope that’s helped clear up a few of the basics on what APR is, how it is worked out and some of the things to be aware of.
"Many lenders provide an APR calculator."
The top things to take away from this as a starting point are that APR is a price tag for borrowing, and be careful not to get confused with ‘variable’ and ‘representative’ APR.
It’s also good to note that many lenders provide an APR calculator, including Ocean. So you can get an estimate before you apply of how much the credit you want could cost you.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.