What is APR?

What is APR?

When applying for credit in the UK, whether it’s for a personal loan, mortgage, or credit card, one of the most important terms you'll come across is APR, or Annual Percentage Rate. APR plays a critical role in determining how much borrowing will cost you over time, and understanding it can help you make informed financial decisions. In this article, we’ll explore what APR is, how it’s calculated, and why it’s so important when comparing different types of credit. We’ll also look at how Kandoo, a UK retail finance broker, can help you find loans with competitive APRs that suit your financial needs.

What Does APR Mean?

APR stands for Annual Percentage Rate and represents the total cost of borrowing over a year. It includes not only the interest rate charged on the loan but also any additional fees or costs associated with the loan. This makes APR a more comprehensive measure of the true cost of borrowing than simply looking at the interest rate alone.

In simple terms, APR gives you a clearer picture of how much you’ll pay for a loan over time. For example, if you borrow £1,000 with an APR of 10%, you will be expected to pay back £1,100 over the course of a year, assuming no other fees or charges are involved.

Types of APR

There are two main types of APR that you should be aware of: representative APR and exact APR. Both can appear when you're shopping around for loans, credit cards, or other forms of credit, and it’s important to know the difference between them.

Representative APR

The representative APR is an advertised rate that lenders are required to display by law. However, it’s important to understand that this rate is only offered to a minimum of 51% of applicants. In other words, just over half of borrowers will receive this rate, while others may be offered a higher APR based on their personal financial situation.

This is why it’s always a good idea to apply for a loan or credit card with a full understanding that the rate you are eventually offered may differ from the representative APR advertised.

Exact APR

The exact APR is the actual rate you are offered after your application has been assessed. This rate is based on factors such as your credit score, income, and the amount you wish to borrow. If you have a strong credit history, you are more likely to be offered a lower APR. On the other hand, if you have a weaker credit profile, you may be offered a higher APR.

When you apply for credit, it's this exact APR that will determine the total cost of your loan or credit card.

How is APR Calculated?

APR is calculated by taking into account both the interest rate on the loan and any additional fees that may apply. It’s expressed as a percentage and represents the yearly cost of borrowing.

Here’s a simplified version of how APR is calculated:

1. Interest Rate: This is the rate charged on the amount you borrow.
2. Fees: Any extra charges such as arrangement fees, annual fees, or processing fees.
3. Loan Term: The length of time over which the loan is repaid.

By combining the interest rate with the fees and spreading them out over the loan term, lenders can calculate the APR, which reflects the true cost of the loan over a year.

Example of APR Calculation

Let’s assume you take out a loan of £1,000 with an interest rate of 5% per year and an arrangement fee of £50. The APR would take into account both the interest and the fee to show you the total cost of the loan over a year.

• Interest: £1,000 x 5% = £50
• Fee: £50
• Total Cost Over One Year: £50 (interest) + £50 (fee) = £100

In this case, the APR would be 10%, as the total cost of borrowing the £1,000 for a year would be £100.

Why is APR Important?

APR is crucial because it allows borrowers to compare different loans and credit products on a like-for-like basis. By factoring in both interest rates and fees, APR gives you a more accurate picture of the total cost of borrowing. This makes it easier to decide which loan or credit card is the best deal for your needs.

For example, you might find two loans with the same interest rate but different APRs. The loan with the higher APR likely has additional fees, making it more expensive overall. Without APR, you might mistakenly choose the loan that seems cheaper based solely on the interest rate, only to find out later that it comes with hidden costs.

APR and Credit Cards

APR is particularly important when it comes to credit cards. Credit card APRs can vary significantly depending on the type of card and the borrower’s creditworthiness. It’s also worth noting that credit card APRs are typically higher than those for personal loans or mortgages, as credit cards are considered to be a riskier form of lending.

With credit cards, there are also different types of APRs to consider:

• Purchase APR: This is the rate charged on purchases made with the card.
• Cash Advance APR: This is the rate charged when you withdraw cash using your credit card, and it’s usually higher than the purchase APR.
• Balance Transfer APR: Some credit cards offer a lower APR for balance transfers, which allows you to move debt from another card to the new card at a reduced rate.
• Introductory APR: Some credit cards offer a low or 0% APR for an introductory period, after which the standard APR will apply.

If you regularly carry a balance on your credit card, the APR will determine how much interest you’ll pay on your outstanding balance. Therefore, it’s crucial to choose a credit card with a competitive APR, especially if you don’t plan to pay off your balance in full each month.

How Kandoo Can Help You Find the Right Loan

Navigating the world of credit and loans can be challenging, especially when you’re trying to compare APRs and other loan terms. That’s where Kandoo, a trusted UK retail finance broker, can help.

Kandoo works with a wide range of lenders to help you find personal loans, car finance, and other forms of credit that suit your financial situation. By using Kandoo’s services, you can compare loans from multiple lenders and get a clearer understanding of the APRs available to you.

Benefits of Using Kandoo

• Wide Range of Lenders: Kandoo partners with multiple lenders, giving you access to a variety of loan options. This increases your chances of finding a loan with a competitive APR that fits your needs.

• Tailored Offers: Kandoo takes into account your individual financial situation to help you find loan offers that are more likely to be approved and come with favourable terms.

• Easy Comparison: By using Kandoo’s platform, you can easily compare APRs and other loan terms side by side, allowing you to make an informed decision about which loan is best for you.

• Transparency: Kandoo ensures that all fees and charges are clearly displayed, so you won’t be surprised by any hidden costs. This transparency helps you understand the full cost of borrowing before you commit to a loan.

Whether you’re looking for a personal loan, car finance, or other types of credit, Kandoo can help you find options with the most competitive APRs available to you.

How to Lower Your APR

If you’re concerned about being offered a high APR, there are several steps you can take to improve your chances of securing a lower rate:

1. Improve Your Credit Score: One of the most effective ways to lower your APR is to improve your credit score. Lenders are more likely to offer you a lower APR if you have a strong credit history. You can improve your credit score by paying bills on time, reducing your debt, and avoiding applying for too much credit in a short period.

2. Shop Around: Don’t settle for the first loan or credit card offer you receive. Use comparison tools like those offered by Kandoo to shop around and find the best APR available to you.

3. Consider a Secured Loan: If you’re struggling to find a low APR, you might want to consider a secured loan. Secured loans, such as mortgages or car loans, often come with lower APRs because the lender has collateral to reduce their risk.

4. Negotiate: In some cases, you may be able to negotiate a lower APR, especially if you have a good credit score or are borrowing a large amount. It’s always worth asking the lender if they can offer you a better rate.

Conclusion

Understanding APR is key to making informed decisions when it comes to borrowing money. Whether you’re taking out a personal loan, applying for a credit card, or securing car finance, knowing how APR works can help you compare different offers and find the best deal.

Remember that APR includes both the interest rate and any additional fees, giving you a more accurate picture of the total cost of borrowing. By using a broker like Kandoo, you can easily compare loans and find the most competitive APRs available to you, helping you make the best financial choice for your needs.

With a solid understanding of APR and the right tools at your disposal, you can confidently navigate the world of credit and make borrowing decisions that work for your financial future.