Baffled by APRs? Don’t worry. Although they’re often the first thing to make our heads spin when we go to borrow money, they’re actually not that complicated. To help clear things up, here’s what you need to know about APRs.
What is an APR?
APR stands for Annual Percentage Rate. This is how much it will cost you to borrow money over a year. It includes the amount of interest and any additional charges for taking out credit. APRs are shown as a percentage so you can easily compare the cost of different loans or credit cards.
How do I compare APRs?
The lower the APR, the cheaper it will be for you to borrow money. For example, an APR of 12% is a better rate than an APR of 18%.
Although APRs do include additional charges for taking out credit, there may be additional fees for a particular loan or credit card that are not included – for instance, an early repayment charge or payment protection. This will vary from lender to lender, so make sure you read the terms carefully before proceeding.
How do APRs work?
When you want to take out a loan, there are two types of APR you can come across: a representative APR and a personal APR (or real rate).
Representative APRs are an advertised rate. They’re the rate at least 51% of people can expect to get when they apply for a particular credit product (e.g. loan or credit card). When you’re shopping around for credit, keep an eye out for quotes with representative APRs. This is because when you apply for this product, the rate you’re actually offered is likely to change. It could be less, but it could also be more – meaning it might cost you more to borrow money than you first thought.
Personal APRs (real rates) are rates tailored to you. This is the rate you’ll actually get when you take out a loan or credit card. Here at Aro, we show you real rates at quote stage, so you can make a more informed decision about whether a loan is right for you.
How is my personal APR calculated?
How your APR is decided comes down to you and your personal circumstances. When you fill out a loan application, lenders will make you a loan offer with a rate that’s based on the information they have on you. This includes:
- Your credit score
- Your personal circumstances
- Any history you have with that lender
Your personal APR (the rate you’re offered) is a reflection of how risky a lender thinks you are to lend to. As lenders don’t have a complete view of your finances (they can only see when you’ve borrowed money in the past, not your everyday finances), you might get a higher rate than you were expecting.
How can I improve my APR?.
If you’ve got a little more time on your hands, the traditional way to get a better rate is to work on building a healthy credit profile – aka improving your credit score. There are a few quick tricks that can give it a boost – such as registering to vote and checking your report for any errors – as well as ways to strive for continuous growth, like using a credit card little and often.
For more savvy ways to give it a boost, read our guide to improving your credit score.
What is APRC?
What is APRC? APRC stands for Annual Percentage Rate of Charge. APRC is used to compare secured loans and mortgages. This is because an APRC covers the cost of borrowing over the entire term of the mortgage – often 25 to 30 years.
For instance, if your mortgage offer has an introductory rate for the first two years which then increases (e.g. a two year fixed rate mortgage that switches to a standard variable rate), the APRC will take into account this change in interest rate.
So, that’s APRs in a nutshell. If there are any other financial terms that you’re not too sure about, you can check out our loans glossary, or take a look through our borrowing archives.
