What is a good APR for a loan?

What does APR mean?  

APR (annual percentage rate) is a percentage that shows you the total cost of borrowing over a year, including all interest and charges. This makes it easier to compare unsecured personal loan and credit card offers. 

What is APRC? 

APRC (annual percentage rate of charge) is a percentage that shows you the annual cost of a secured loan or mortgage, over the full term. It’s designed to make it simpler for you to compare different offers. 

Unlike APR (which is just one rate), APRC includes all interest rates and charges applied over the entire lifetime of the loan or mortgage. This includes any initial rates as well as follow-on rates and fees. 

Is a higher APR better?  

Actually, it’s the opposite – a higher APR is considered to be worse. This is because the higher the APR, the more the loan will cost overall. So, it’s generally best to go for a loan with a lower APR if you can get approved for one. 

What is representative APR?  

Where you see a ‘representative APR’ advertised, this means at least 51% of their customers get this rate or better.  

What is guaranteed APR? 

Some (but not all) lenders show a guaranteed APR. Unlike representative APR, this is the exact or real rate you’ll pay if your loan application is approved. Loan approval depends on your individual circumstances.  

What affects the APR on a loan?  

There are a few things that affect the APR you get offered on a loan: 

• credit score and credit history – people with a good credit score and credit history tend to get offered lower APR because they’re considered less risky to lend to. 

• debt-to-income ratio – if your monthly debt repayments are low compared to your income, then you’re more likely to be offered a low APR. 

• how much you want to borrow – borrowing a larger amount could mean a lower APR, but you should only borrow what you need and can afford to repay. 

• how long you want to borrow for – if you get a large loan and spread it over a long period, you may have a lower APR compared to a small loan with a short term. But you could end up paying more interest in total. 

• the loan type – personal loans tend to come with higher interest rates than secured loans. This is because they are seen as riskier by the lender, as there is no collateral to back the loan if you fall behind with the repayments. However, secured loans tend to come with fees (such as lender fees and broker fees) - these will be included in the APRC. 

• the lender – each lender will have their own APRs and eligibility criteria 

How do I get a low APR loan?  

There are several ways you can improve your chances of getting a low APR. 

1. Improve credit score and credit history  

Loans with a lower APR are generally offered to people who have a good credit score and no negative marks on their credit history. If you’re struggling to get a loan or are only eligible for a high APR, it may be best to work on improving your credit score first. 

For example, you could: 

• join the electoral roll 

• always pay your bills on time 

• check your credit report for any mistakes 

• ask credit reference agencies to remove old ties that have bad credit from your report 

• avoid making multiple credit applications in a short space of time 

A loan could help you to improve your credit score and chances of getting lower interest rates in the future if you pay it on time, every time. Otherwise, it can harm your score and ability to get further finance. 

2. Reduce your debt  

Paying off your debt will decrease your debt-to-income ratio. This is a good thing because it’ll mean you have extra spare cash to put towards a loan, so lenders may feel more comfortable lending to you. 

Reducing your spending on overdrafts and credit cards to around 25% or less of your total credit limit will improve your credit score. Plus, it’ll show lenders that you are a reliable borrower. 

3. Consider the loan size  

Typically, the larger the loan, the less interest you’ll pay – but make sure it’s affordable and don’t borrow more than you need. Otherwise, you could end up struggling to pay the loan back and getting late or missed payment fines.  

On top of this, missed or late payments will show on your credit report and will bring your score down. 

4. Consider a longer loan term  

A longer loan term can mean you get offered a lower interest rate. However, you may pay back more overall if it’s spread over a longer period – even with a lower interest rate.  

5. Consider getting a guarantor  

A guarantor is somebody who essentially promises the loan will be paid back by agreeing to become jointly financially responsible for it. If you have a poor or thin credit history and you choose a guarantor will a high credit score, you boost your chances of getting offered a lower APR. 

Be aware, if you fall behind with the repayments, the guarantor will need to pay. This can be risky for both parties, so you need to consider the pros and cons first. Situations like this could damage the relationship between the two of you and affect both of your finances. 

What else do I need to consider before getting a loan?  

Besides APR and interest rates, there are some other factors you should consider before getting a loan: 

• eligibility – once you’ve found a loan deal you want to take out, use an eligibility checker to see whether you’re likely to get accepted for it before applying. This won’t leave a footprint on your credit report 

• affordability – you need to be able to commit to the monthly repayments, leaving some room in case your financial circumstances change in the future 

• potential additional fees – these could include late payment fees or early repayment charges, which aren’t included in the APR