Understanding APR

| February 26, 2013
Understanding APR

Understanding APR

The annual percentage rate is one which we’re all very much used to seeing when looking at financial products, but it’s not actually a widely understood term. It’s a very good way of comparing one loan to another, but it’s always useful to know exactly what it means.

The APR is a good way of measuring the cost of a loan because it includes not only the interest charged, but also any fees .  The APR is therefore a measure of the overall cost of the loan, that is, the interest and fees payable.  Sometimes you might see only the interest rate, but charges can easily increase the APR by several percent. The APR figure is the average rate of interest plus fees payable over a year.

The APR could for instance, show you how much cheaper a secured homeowner loan is likely to be compared to a credit card or personal loan.

By law, lenders must tell you the APR of the product before you sign any kind of agreement.

Now, there are some things to watch out for when it comes to looking at APR rates. The main one is the typical or representative rate. This is usually the headline figure that you’ll see advertised the most, but it isn’t necessarily the rate that you’ll get. Instead, this is what the majority of borrowers will receive. Some may enjoy less, but others will only be offered a higher rate.

Another thing to be aware of is that the APR will only include compulsory fees that have to be included with the loan. There may be optional extras which don’t have to be included in the APR. Ensure that if you don’t want any of these extras, you opt out.

The final thing to remember is that the APR is an average over a year in the life of the loan, so it’s not always accurate when you’re going to be paying different interest rates over the loan period. A mortgage is a good example of this. Often, you’ll pay a different rate for the first few months, and then a higher one after. This might mean that you never actually pay the APR on any single monthly payment. If you have several credit cards and loans and want put all your credit in one place consider consolidation loans.

If you remember to check the terms and conditions before you sign for anything, then the APR is a very good way of comparing loans, as long as you understand what it means.

Understanding APR

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