What does APR mean?
APR stands for Annual Percentage Rate – this is how much you’ll be charged in interest and fees on an annual basis when you take out a loan. This is different from the interest rate you’re charged because it contains both interest and any fees you’ll have to pay (not including any potential additional fees, such as late payment fees or early repayment charges).
Lenders are legally required to give you the APR when you borrow, allowing you to compare the price of different products more accurately and easily.
What is representative APR?
Representative APR is the Annual Percentage Rate that you’re likely to be offered with that product, as it’s based on what at least 51% of customers are quoted. This doesn’t mean that you’ll definitely be offered that rate (you may fall within the remaining 49%), but it gives you a good basis for comparing products.
Is a higher APR better?
Actually, it’s the opposite – a higher APR is considered worse. This is because the higher the APR, the higher the cost of borrowing. A high APR will bring the total cost of your loan up, so it’s generally best to go for loans with a lower APR if you can get approved for them.
What affects the APR on a personal loan?
Personal loans are unsecured, so there’s no collateral or safety net in place for them if you fall behind with your repayments. This makes personal loans riskier to lenders than secured loans (where an asset such as your home is used as collateral). As a result, the APR on personal loans tends to be higher compared to secured loans.
Bear in mind, that if you take out a secured loan and fall behind with your repayments, the lender could repossess your home to claw back owed funds (as a last resort).
There are various factors that affect the APR you get offered on a personal 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 lower amount could mean a higher APR
- how long you want to borrow for– if your repayment plan is quite short, you could end up with a higher APR, but if you borrow a larger amount over a longer period you may pay more interest overall
While a lower APR is generally better, it’s important to consider the overall cost of the loan. You could get a lower APR by borrowing a larger amount over a long period of time, but end up paying more in interest and fees in total.
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
- ask the credit reference agencies to fix any mistakes on your credit report
- remove old ties that have bad credit
- 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 incurring 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
Again, 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.
You could use a loan calculator to find out how much it’ll cost you in total, by entering the loan amount, loan term, and APR.
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. However, 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 personal loan?
Besides APR and interest rates, there are some other factors you should consider before getting a personal 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
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Intelligent Lending Ltd is a credit broker working with a panel of lenders.