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APR – What Exactly Is It?

APR – What Exactly Is It?

APR Explained

Let’s start by breaking down the acronym itself – ‘Annual Percentage Rate’. This essentially refers to the annual amount (rate) it costs you to borrow. It’s important to note this includes the interest and fees you’ve agreed to pay. We strongly advise you have a really good understanding how the rates and interest work ahead of applying.

Here’s a quick example on borrowing a loan at £5,000 over 4 years at a 4% APR – So, the annual interest rate and standard fees are included in the agreed 4% APR. Then, over the 4 year term you’d pay 48 monthly payments of £112.74 to the lender, this would give a total repayable value of £5,411.30. Meaning, your actual charges for borrowing the £5,000 are £411.30 in fees and interest.

So why is it, that when applying for finance, loans or credit cards, the interest advertised is drastically different to the final amount that’s offered? Well, when you look closely at those initial examples given by lenders, you’ll notice that most of them state a ‘representative APR’, which only complicates the matter further.

Representative APR

Representative APR is the advertised amount or rate, which is there to give you an idea (for comparison purposes) of the rates available. This representative rate will be offered to at least 51% of customers who apply for the financial product. But where does that leave the remaining 49%?

Provided at least 51% of applicants receive the advertised APR, a lender can then offer customers a different APR. This might be a higher rate than advertised, but it may also be lower, this is why it’s important to try and best understand what’s available to you before you actually apply.

someone trying to work out their APR online

Why Is a Representative APR Needed?

Representative APR is important because it allows banks and lenders to advertise their rates to a larger target market! When you apply for any kind of credit, your credit history is taken into consideration. It’s at this point when a bank will be able to work out exactly what credit they can offer you, and at what rate.

The problem for lenders is that everyone has different circumstances, meaning some customers won’t be eligible for the best rates or certain loan amounts. As a bank/lender can’t individually pre-approve and advertise to everybody, they must use a representative APR to show a calculation of a visual borrowing example.

Why Do Lenders Display Different APR Rates?

This mainly applies to internal business considerations based on their overall lending benchmarks. Generally speaking, lenders have different outlooks on their risk when they assess lending to you.

Guidelines determine that a company should work out it’s representative APR by using previous examples of credit agreements from products such as payday loans, car finance, or bad credit loans. The examples used should be recent, ideally within the last 12 months.

Representative APR and Financial Products

As mentioned above APR will vary massively from product to product, the more ‘high-risk’ a loan is for the lender, the higher the representative APR will be.

In a nutshell, the risk factor for a lender is determined by someone’s previous credit activity. They see it as a perilous investment when lending to someone with poor credit or even no credit.

Higher risk products include areas like:

Low credit score loans
Poor credit loans
Payday loans for bad credit

How to Find Out What Your Rate Is

Having a good idea of what your rate is before you apply will set the tone on understanding what’s affordable.

To simplify things, LoanBird has put together a platform where you’ll see if you’re eligible for a loan with one of our lenders before you actually commit to anything. To find out what your APR could be across 30+ lenders, all you need to do is fill in our application form.

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