What is APR and How is it Calculated?

Financial jargon can be technical and difficult to understand. If you don’t know your APR from your VAT, then understanding your finances can be even trickier. However, help is at hand.

We’ve put together this APR explainer. We’ll cover popular customer questions, such as “what does APR mean?” and “how do I calculate APR?” To do this, we’ll examine what APR is and how it works.

What is APR?

APR stands for ‘Annual Percentage Rate’. It should take into account the interest on a financial product, such as a loan or credit card, as well as any other charges you must pay for taking out that financial product.

APR is standardised to show the cost of borrowing over a year long period, which means that you can use it to compare financial products accurately. The Financial Conduct Authority have a “what is APR” explainer that states:

“You can use it [APR] to compare different credit and loan offers. The APR takes into account not just the interest on the loan but also other charges you have to pay, for example, any arrangement fee. All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender.”

To ensure fairness and make sure that you can compare different financial products and their costs accurately, the formula for calculating APR is laid out in the Consumer Credit Act (1974), and every lender must follow it.

Is APR Important?

APR is important, particularly if you’re comparing quotes from lenders. It means that a lender cannot hide any additional charges, so you get an accurate picture of what borrowing will cost you.

Plus, because you can directly compare APR between lenders, you can ensure that you’re getting the best possible deal.

What Does ‘Representative’ Mean?

When you see APR advertised, you may see that it’s classed as ‘representative’. To be representative, this is the APR that the lender expects to offer to at least 51% of the customers responding to the advertisement. Our representative APR is 59.9%.

However, you should remember that any lender’s representative APR is not a guarantee that you will receive this rate if you apply. You could pay more than the representative rate advertised.

This is because the rate of APR you’re offered depends on your situation. It will be based around your individual circumstances and the amount of money you’re looking to borrow. This can only be fully determined once an application has been fully submitted.

How Does APR work?

We’re often asked how to calculate APR. This can be a tricky question to answer due to the number of variables involved in the process, such as:

  • The interest rate.
  • When interest is charged (this could be daily, weekly, monthly or yearly).
  • Whether there are any initial fees, such as a bank fee.
  • Whether compulsory charges are applied to the loan.

Interest is usually added to your outstanding debt. For example, if you owed £1,000 on a credit card with an APR of 20%, if that debt remained unchanged for a year, then you would pay £200 in interest.

The longer the period over which you spread your repayments, the lower the monthly cost but the higher the overall interest paid.

We hope our guide to APR has helped to answer any questions you may have. At Likely Loans, we pride ourselves on offering access to loans to people who may have experienced difficulties in the past. By completing an online loan application with us, we’ll be able to give you an instant decision on your eligibility and the APR we could offer you. Apply online today or visit our FAQs if you have further questions.

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