Understanding APR
APR is complicated. Let us break it down for you and try to explain how APR works and how you can use it to make better financial decisions.
Grasp the basics of APR and understand how it affects you
APR stands for Annual Percentage Rate and it is a figure that you’ll find alongside all financial products – such as loans and credit cards.
It’s important to understand APR because it can have a big effect on how much you eventually pay back.
APR is calculated by taking into account the interest rate of the loan or credit product, as well as any other fees and charges that may apply. This means that APR gives you a more accurate representation of the true cost of borrowing money.
For example, if you take out a loan with an interest rate of 10%, you would expect to pay back £110 after one year if you borrowed £100. But if there are other fees and charges that apply, APR will be higher.
APR is typically expressed as a percentage and it’s important to remember that it’s a yearly rate. This means that if you’re only borrowing money for a short period of time, APR may not be such an important factor.
It’s also worth noting that APR is different from the interest rate charged on a loan or credit product. The interest rate is simply the amount of interest that you’ll pay on the outstanding balance each year. APR takes into account both the interest rate and any other fees and charges.
So, APR is a more accurate way of comparing different financial products and it’s something you should always consider before taking out a loan or credit card.
Understanding APR
Why is the APR for short term & payday loans so high?
This is because an APR is an annualised rate and a short term loan is usually taken for less than 1 year, the percentage shown is much higher – generally, using APRs as a metric for comparing loans under one year is not particularly useful.
What is the easiest way to compare loan costs without using an APR?
For payday loan and short term loans, using the total amount payable is a much more reliable way to see the true cost of a loan.
Why is the APR on my loan high?
If you are looking for a bad credit loan and it’s over one year, usually you’ll find the APR starts around 49% and can go up to over 100%. APRs are high for bad credit loans due to the risk the lender is taking.
Should I take out a loan with a high APR?
It would be easier to consider the total amount payable and the monthly repayments rather than looking at the APR. If you feel like the repayments will be too much, do not take the loan as it will help a short term problem but will eventually create a much bigger, longer term problem for you.
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