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What is APR

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Annual Percentage Rate (APR) is the term used to describe the amount it will cost you to borrow money for one year.

It is calculated using a standard method with an assumed level of borrowing of £1,200. The calculation also takes into account the interest charges and any other fees, such as annual fees or arrangement fees, to reflect the total cost.

APR is designed to help borrowers make an informed decision when comparing financial products on the market, and so lenders are legally obliged to display the rate when advertising any type of credit.

Types of APR

While APR is considered one of the clearest and fairest ways to compare loans, overdrafts, credit cards, and other products, it’s important to be aware of the different types as they could have a significant impact on the cost of your debt

Fixed

what is aprA fixed APR is generally used for borrowing that is repaid in predetermined instalments, such as a loan. The APR generally remains the same for whole the term of the borrowing, but it doesn’t have to. The provider is allowed to change the APR if they give you 45 days’ notice.

Variable

Unlike a fixed APR, variable APR can change without notice and is usually linked to another interest rate, such as the Bank of England base rate.

Representative

When lenders are advertising their products, the APR displayed might not be the rate you will actually receive. The representative APR is the rate that the majority of applicants must receive. While that sounds positive, a majority is only 51%, so there could be 49% of borrowers paying a much higher rate.

Typical

As the representative APR isn’t the most accurate rate, there is another type of APR: typical APR. This is the rate that two out of three applicants must receive. It is more reliable than the representative APR, but it is still important to check the exact rate you’re offered.

Personal

The representative and typical APR might be the advertised rate, but the actual rate you receive will depend on a number of factors, including your credit score. The lender should inform you of your personal APR when you apply, and before you sign the agreement, so check it is in line with your expectations.

Why APR isn’t always a good thing

It’s widely agreed that APR is one of the fairly ways of comparing the cost of financial products, but some lenders argue that it isn’t always the best.

Payday lenders have argued that because APR is the annual measurement of the rate, and their loans are only designed to be used for the short term, perhaps 30 days, it is misleading for customers.

Some have said that comparing a payday loan to a standard bank loan is similar to comparing the cost of staying in a hotel to your monthly rent. Neither a hotel nor a payday loan is designed to be a long-term fix, and as such, they don’t warrant an annual rate.

LenderLoan Amount
over 60 months
Representative APR%Cost 
£5,00015.9% APR £121.32 per monthApply
£5,00048.5% APR £222.76 per monthApply
£5,0006.9% APR £98.28 per monthApply
£300 over 65 days574.86% APR£136.51 per monthApply
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About Jemma Porter

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About Jemma Porter

Jemma Porter is an experienced content creator who has written for a number of online publications. A self-confessed penny pincher; she's often found seeking out the best personal finance deals.

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