Tuesday 23rd Aug, 2022
When you are looking to borrow money, you will see lenders advertising an APR (Annual Percentage Rate).
The purpose of the % APR is to tell you the full cost of borrowing as a percentage rate calculated over a full year.
The % APR must include not only the amount of interest charged but also any fees that are automatically included such as an application fee, annual fee or arrangement fee. Of course, not all lenders will make these kinds of charges.
APR is a helpful feature because it allows you to compare different financial deals, on a like-for-like basis, and all lenders have to tell you what their APR is before you sign up for the loan.
The lower the APR, the cheaper the cost of taking out that loan. The higher the APR, the more expensive it will be to borrow over a given time period.
Sometimes, you will see the term ‘representative APR’ quoted on a loan product. What this means is that just over half (51%) of the successful applicants have been given the advertised rate. The rest will usually have been charged a higher rate, while others will have been rejected for a loan.
Generally, you will find that small loans carry a higher % APR than large loans. The reason for this is that the rate charged on all loans tends to reflect the cost of administering the loan.
The actual cost of assessing and administering loans may not vary much whether the loan is large or small, but as small loans tend to be repayable over shorter timespans, that cost cannot be spread out so much and therefore has to be recouped in bigger chunks.
The rate will also reflect the level of risk. As small loans may be available to people with below-average credit, the risk of them not being repaid in full is higher than for other loans. To manage this risk, the lender is likely to charge a higher % APR.
For a full explanation of how APRs are calculated see: https://www.moneysavingexpert.com/banking/interest-rates/
This article is for general information only and does not constitute financial, legal, or any other form of advice.