Arm Yourself with All the APR Facts

If you’re in the market for a new loan, whether it’s a small one to pay for some unexpected bills, or a larger one for a car purchase or home renovations, then there’s no doubt that you’ve encountered all of the jargon that accompanies the industry. It can be quite difficult to work out exactly what everything means, and one of the most common things people have difficulty with is the APR, or annual percentage rate. In the UK, it’s required that all loans display this value, to make comparisons easier, so it’s good to know what it means, and you’ll see it everywhere.

Annual percentage rate
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The key thing to remember about the APR is that it is intended to give consumers all they need to work out how one loan stacks up against another one. This is because crucially, it incorporates not only the cost of borrowing, but also any compulsory fees associated with the loan. This is why the APR is higher than just the interest on the loan. It’s intended to be easily comparable in a world of complicated figures.

An Overview of APR

Now there are some very important things to think about when you do consider the APR of different loans that aren’t immediately obvious. Keeping these in mind will help you make an informed decision.

  • Firstly, the APR is a good barometer for yearly comparisons only. Some short term loans look to have incredibly high APR for instance, but this doesn’t necessarily mean that they are as expensive as they look. As the APR takes into account fees as well as interest, for loans much shorter than a year, the figure is for what would happen if you took the loan out for a longer period than you’re supposed to.
  • Similarly, as the loan is broken down into yearly chunks, it is averaged out. This is a common problem when looking at mortgages, which may have varying interest rates throughout. You may pay an initial percentage, which may increase later on, but the APR would illustrate just an average over however long you took out the mortgage for in the first place.
  • Next up are the charges. We already know that compulsory charges are included in the APR rate, but what about optional ones? That’s right – they are not taken into account, but may well be loaded onto your loan, if you have chosen to do so. This means that you need to check how much the provider charges for options such as payment protection insurance (check if you need it first) when making a comparison. The one with the higher APR could end up being cheaper in the long run.
  • The headline APR that a company advertises might not be the rate that you get when you are successful with your application. This is the typical figure that they offer customers, but will vary depending on your personal circumstances.

Breaking down and calculating APR yourself can be tricky, which is why online calculators are pretty useful. Give the one on the Nemo site a go to see some examples – you can put in the amount you want to borrow, and the number of years you’d like to take it out over. It’ll come back with the total amount and monthly costs for their lowest and highest rates.

APR then, is a good metric for you to use when you’re comparing loans, but it’s important to have all the facts. One single figure can’t tell you everything you need to know about a financial product, and there’s no substitute for doing plenty of research and of having a good chat on the phone with the provider you’re thinking of using.