APR is one of those wonderful acronyms. Everyone’s seen it, everyone kind of knows what it means but no one’s exactly sure. APR stands for Annual Percentage Rate.
It illustrates the true cost of the money borrowed on loans, mortgages, and credit cards, and by law, consumers must be provided with that information, although the rules governing credit advertising under the Consumer Credit Act set out “triggers” that indicate when an APR must be shown in an advert.
The APR calculation takes into account the basic interest rate, any initial fees, when interest is charged (i.e. daily, weekly, monthly or annually) and any other costs you have to pay. As all lenders are legally required to calculate APR the same way, it should enable consumers to make meaningful cost comparisons between lending products, including any fees that are added in addition to interest charges.
Now, that’s the basics out of the way. Now things get a little more complex. You’ll have seen Typical APR written down most of the time. Typical APR means that 66.666% or 2/3rds of their customers got that interest rate or less. However, APR can range. That remaining 3rd may have got a much higher rate.
OK, now what’s a variable APR? All lending in England & Wales is based upon the bank of England Base rate. The company then adds onto that based upon the risk they perceive in lending to you to come up with your interest rate. They then add any fees and such like to work out the APR. Now because the Bank of England base rate goes up and down a variable loan goes up and down with it. If the loan is not fixed and is variable then the interest rate you’re paying on your loan is variable too. At the moment, despite recent rises in the base rate, lending in the UK is still quite cheap. However consider if you take out a variable rate loan. Could you afford the repayments if the interest rate doubled, or even tripled? It’s worth considering.