What is APR?

Confused by APR? Well, you are probably not the only, the first and certainly not the last person confused by APR. APR stands for Annual Percentage Rate and when applying for loans or credit cards it is the figure you get slammed with every time. But what does it mean, how can you work it out and how can you use the APR figure to compare loans? This Review Centre FAQ will attempt to shed light on all these issues and hopefully make you a more informed consumer when it comes to Loans.

APR is actually worked out through a mathematical formula. Since most of us celebrated the day school ended and we threw away our maths book, we'll leave the formula and explain APR in non-mathematical terms. However, if you were really eager you could contact the Office of Fair Trading and request details. Furthermore you might want to find yourself a good maths book to help you make sense!

In its strictest definition, APR is the expression of effective interest rate you will pay on a loan. It takes into account things such as one time fees you pay. As a result, it standardises rates and that makes it easier to compare loans. By standardisation (another one of those exciting mathematical/statistical terms) we mean that it tries to 'make things the same'. By ensuring that APR includes not only the interest rate on the loan, but also other fees you don't start comparing loans only to find afterwards that one included arrangement fees and that was the reason it seemed higher, but actually it worked out cheaper!

If this is still too technical for you, just think of it as the difference between Miles and Kilometres. You can only compare those if they are both made the same, so for example if you would express both 1 mile and 1 kilometre in metres. So 1 mile is 1600 metres and 1 kilometre is 1000. What we have just done is what you would call standardisation, we've made them both the same. Now it makes sense to compare for example 4 miles (=6400 metres) to 4 kilometres (=4000 metres) and it becomes clear that although they seem the same, they are not and 4 miles is over 50% more than 4 kilometres. The same goes with APR, because loan companies are required to include certain fees on top of the actual interest rate, it makes comparison easier.

BUT (and unfortunately just now you thought you started to understand there is a 'but'), critics argue that it still isn't that easy to compare loans based on APR. This is because although APR includes certain fees, it doesn't include all fees. Loan companies are only required to calculate compulsory fees into their APR. This means that for example payment protection insurance is not included in the APR. However, once you take a loan you are very likely to also take out a payment protection insurance for peace of mind. Some lenders use this for their benefit and advertise a low APR, only to then make additional fees such as the payment insurance protection very high. So that means you can still end uaying more for a low APR loan than for a higher APR loan.

Finally APR does not take into account changing rates. It is only an average of the variety of rates over the whole of your repayment period. Knowing this can be very handy especially when you are comparing long term loans such as mortgages. You may find that the first 3 years you pay a fixed rate which is significantly lower than the rate you pay for the remainder of your repayment period. This fixed rate may well vary from loan company to loan company and it would be good to know these rates. However, since APR does not reflect this difference, you cannot make this much of an informed decision based on APR alone.

So, what is the advice then? Here's 5 steps that should get you a long way:

Take your time, do not tie yourself to something based on flashy advertisements and great figures alone.

Make a shortlist of loans you think look good, note down not just the APR, but ask further details about payment protection plans and other details such as how long before you can change to another loan provider if you would like to, can you make additional ad-hoc payments, what are the charges for late payments etc.

Check out our Loan reviews here on Review Centre to find out what customers actually think of the loan and the loan company once they got out a loan: Loans

Always keep in mind that loan companies are not offering you loans because they are just nice and want to save you money. At the end of the day loan companies exist to make money. You need to therefore go for the one that is best for you, based on some good research you can do yourself!

Review Centre does not accept any responsibility for any loss, damage or injury that may arise from using the information on this website. It is your personal responsibility to confirm the accuracy of the information on these pages before you take any action based on this information.

Review Centre does not accept any responsibility for any loss, damage or injury that may arise from using the information on this website. It is your personal responsibility to confirm the accuracy of the information on these pages before you take any action based on this information.