A layman’s guide to APR
You may see the phrase 'APR' quoted next to the interest rate on many pieces of marketing material for mortgages, loans, credit cards and other borrowings. It stands for Annual Percentage Rate and is derived using a complex mathematical formula and is quoted so that consumers can compare the potential cost of lending products.
The APR is an indication of the total interest rate paid over the entire year and is an annualisation of the monthly rate. It applies to lending products whether they taken out over a fixed term, such as a personal loan, or whether they are rolling forms of credit, such as with a credit card agreement. All lenders are required to disclose the APR that relates to the financial product that you are buying, before you sign on the dotted line of the agreement.
The way that the APR is calculated in the UK and the rest of the European Union is determined by legislation passed in EU directive 98/7/EC. However, the UK definition of APR has been in existence since the passing of the 1974 Credit Consumer Act which specifies that the Annual Percentage Rate must be more prominently displayed than any other rate or charge. Generally speaking the higher an APR, the more a customer will pay in interest and/or charges.
From a customer's point they should shop around as a low APR is preferable for all loan products or for credit card accounts on which you intend to carry forward a balance. The APR could be variable if the interest rate on the loan product is not fixed, so if you are thinking of taking out a lending product check whether your repayments will be fixed, or may vary.
APRs typically quoted for any loan products can also vary widely according to an individual's credit rating. Banks, building societies and credit card issuers can increase or decrease an advertised interest rate according to a borrower's credit worthiness, with those being considered the best risk being offered the lowest rates. With certain lending products interest rates can be changed after the loan is extended, so be aware that the APR could subsequently rise.
In addition to the APR, loan products and credit card accounts will also have other associated charges so when shopping around consumers should examine those carefully. However, when it comes to credit cards, if you are considering not clearing the balance each month than opt for a card that offers the lowest APR.
