You must have seen APR on loan agreements with other financial topics like credit cards. But are you aware of the term’s implications? It is a critical aspect that can help you compare loans and credit card deals better and choose the right one. This guide discusses what APR means and how it works.
What is APR?
APR stands for Annual Percentage Rate. It is the total annual cost of any credit element like loans or credit cards. The annual costs represent percentages. It also includes fees like- loan establishment fees, late fees, administrative fees, and closure fees. It does not include compounding interest rates and fees. It can be fixed or variable. A high APR means you will pay high fees on the loan product or the credit card.
Do not confuse interest rates with APR. Both are different terms. You can spot interest rates as 22.2% p.a., but the APR is 27.3% per annum. As the impact is £25, the annual fee is equivalent to another 5.1% interest.
The term APR defines loans and credit card adverts. It means only 51% of customers get the advertised rate. The individuals are likely to get a higher rate. Suppose one borrows for a longer time. The APR is high.
What is the difference between fixed and Variable APR?
Most loans and other financial equipment have fixed or variable APR. Thus, knowing the APR type your loan has to budget easily is important.
| Fixed APR | Variable APR |
| The fixed APR determined by the credit provider at the time of the loan remains intact throughout the loan term. | Variable APR changes with indexed interest rate changes. If interest rates increase, APR will increase and vice versa. |
| The monthly payments on a fixed APR loan remain the same until the loan term | The payments may fluctuate as per the market. You may either pay the lower or considerably high amount by the loan’s end term |
| Mortgage and car loans are examples of a fixed rate APR | Credit cards and home equity lines of credit are some examples of variable APR |
Variable rate APR is ideal for a 0% introductory rate for the promotional period. Missing a payment on a Variable interest loan affects your credit rating drastically. Fixed APR prevents your finances from facing significantly increased loan payments under high market interest rates.
Which is Better among Fixed or Variable APR?
As per studies, fixed-rate APR is the best. The terms and repayments remain the same throughout the loan terms. It remains the same irrespective of the market situation. The interest rates may rise and fall as per the market.
Thus, fluctuations may cause changes in loan repayments. Fixed-rate APR helps one budget smoothly and pay-off debts. It is especially ideal to choose one for long-term loans. Here are some parameters that may help you decide right one while applying for a personal loan or credit card:
a) Risk tolerance
It is ideal for individuals having a fixed budget for every household and other expenses. With a fixed income, you may benefit from a fixed-rate APR. It would help you keep your finances well unless you miss a payment.
On the other hand, if your income is variable. A variable rate is ideal if it changes frequently, like in a business. With this, you may have more disposable income to pay extra if the interest costs rise. It will not impact your finances much. It is all about the financial flexibility or cash reserve you have to undertake risks.
b) Impact of existing interest rates
Analyse the existing pattern of the interest rates. If you believe it may rise soon, stick by the fixed rate APR. It will provide more stability throughout the loan term. However, if the interest rates decline, you may benefit from a variable rate APR.
Apart from these, if you want to prioritise peace and eliminate surprises amid professional and personal finances, fixed APR financial equipment is ideal for you.
How does APR work?
The annual percentage interest rates are expressed in percentages. It is the count of the total amount you will pay as principal over a loan for a year. It undertakes monthly payments, fees and interest rates to calculate the amount. Lenders must disclose the APRs as is to the borrowers in the agreement. Missing a payment on the loan increases the APR.
For example, Loan A includes an arrangement fee costlier than Loan B, which does not charge it. It means APR on Loan A will be higher than Loan B.
Thus, Loan B is a cheaper alternative for your finances.
Precisely, the repayments on the loan stays the same throughout the loan term. At the beginning of the loan term, the interest is high. As you move near the loan closure, the repayments include less interest but more loan balance.
What is the difference between interest rates and APR?
There is a vast difference between APR and interest rates. APR includes fees that a lender may charge along with interest rates. Precisely, APR is the total interest you pay on the loan in the year. As APR undertakes and is a sum of total loan costs, it is higher than interest rates.
It is the reason one should check APR than interest rates before applying for a loan. Lenders calculate both parameters differently. APR can increase your overall loan costs even if you borrow a sum at a lower interest rate. The reason for the same can be – missed payments or loan default.
Precisely, the interest rate is the cost of borrowing the principal amount or the amount you want. APR is the cost of borrowing the principal amount plus any additional fees. APR includes interest rate costs.
What is a representative APR?
It is the rate that the APR is advertised at. It is the rate offered to at least 51% of the representatives that applies for a particular loan product. However, the lender does not guarantee this rate to everyone. One may grab a higher rate than this.
The representative APR differ from the Personal APR rate. In personal APR rate, the lender decides the APR by analysing personal finances, credit score, income and loan affordability.
What does Good APR imply?
A good APR usually depends on the finances, credit score, loan type and interest rates. A good APR is lower than the current average interest rate. Individuals with good credit scores get better APR.
When the company’s low-interest rates, they offer good APR on their credit products, like a 0% on car loans and other lease options. Although these low APR rates one clock by ensuring good financials may not last long. It is thus important to verify whether the APR is fixed or variable. If they are introductory, the interest may increase after a time limit.
If you have a high credit score, good and recurring income, and lower debts than income, you may qualify for Good APR rates. Thus, you may get better loan rates with Onestoploansolution, a responsible direct lender with sound finances, credit score, and income. It provides personalised loan assistance to individuals.
Bottom line
APR is the theoretical cost of the money borrowed or loaned up. It grants the borrowers and the providers insight into the amount they pay or earn on a loan amount. Different lenders charge different fees. It may impact the APRs too. Before applying for any loan or credit card, analyse the APR rather than just interest rates. APR includes interest costs too.
Mark Williams works as one of the Loan Advisors at a direct lender firm, Onestoploansolution. He has been working with the lender for about 15 years. He has been known to facilitate his employer in remarkable ways from writing to consulting and whatnot. He is a professional who wants to explore more of the UK financial market, the loan products and how customer requirement changes with time.
