APR stands for Annual Percentage Rate. It is designed to help customers compare products effectively when they need to borrow money.
What is APR?
Banks, credit card companies and other lenders will quote an interest rate for any product they offer. This is important but an interest rate alone might not always tell the whole story. There may be additional costs involved with taking out a loan or setting out a credit card such as arrangement fees, administration costs, annual fees on a credit card and account closure costs. The exact nature and amounts of these additional costs can vary greatly depending on the type of loan product, the company offering the loan and the individual products themselves.
APR takes into account the interest rate charged when obtaining the loan. This means the APR may be different than the interest rate. A product with a low interest rate and high fees may cost more overall than a product with a higher interest rate but lower fees. APR is designed to help customers make the best comparison between the overall costs of two or more loans.
The Financial Services Authority (FSA) says:
“APR stands for the Annual Percentage Rate of charge. You can use it 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.”
What products is APR applied to?
In the UK, APR is required by law to be provided for all credit offered by companies that are regulated by the CCA (Consumer Credit Act). Credit products can include mortgages, credit cards, credit for new cars and other purchases, payday loans and regular secured and unsecured loans. The APR should be displayed as prominently as any other rate.
Generally, APRs are designed to allow the customer to compare the costs of two or more similar products. The APRs for two different mortgage products, for example, should provide a clear comparison of the overall costs involved.
APR on credit cards
The stated APR on credit cards usually applies to the standard rate for purchases. This may be different to the same card's rates for balance transfers or cash advances, which are generally higher. The APR will take any compulsory fees such as an annual charge into account.
Some credit cards may have an introductory APR for new customers. This will typically revert to a higher standard APR after a given length of time. The standard APR must also be provided before a customer signs a credit card agreement.
APR on mortgages
The APR is based on the total lifetime of any loan. For mortgages, this is typically 25 years, although longer and shorter terms are also available. The APR is therefore calculated by considering the total interest cost over the 25 year term of the mortgage. All compulsory fees are also taken into account.
Very few people keep the same mortgage for its full term though. Some customers may sell up, move house or switch between fixed rate, tracker and variable mortgages with the same lender. Some may remortgage a property with a new lender. As a result, the APR may not give a truly accurate indication of costs if a single mortgage is not kept for its full term, but it can still provide a useful comparison between different products and deals.
APR on loans
Most loans tend to be paid back at regular intervals and amounts and the APR is, therefore, more straightforward.
The APR only takes compulsory fees into account. This means that voluntary payments such as Payment Protection Insurance (PPI) are not taken into account when it comes to working out APR.
Representative APR
Some people may not qualify for the advertised APR for a particular product. Lenders will take various factors into account, such as credit rating and income, before offering a particular rate. Rules on 'representative APR' do mean that the majority of applicants would qualify for the advertised rate however.
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