We’ve all seen those adverts for loans and credit cards – the benefits sound great, but tucked away in the smallest possible print at the bottom of the screen or poster is a little note about APR.
But what is this hidden cost, how does it work, and how can you ensure you get the best possible deal?
What is APR?
APR stands for Annual Percentage Rate. All financial products that see you take out credit – whether it’s a mortgage or a humble credit card – must, by law, show how much the APR is, and includes basic interest and other surcharges, all rolled into one.
According to the Financial Conduct Authority,
‘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.’
Boiled down to its essence, the APR on any given financial product is how much it’ll cost you to borrow money.
What’s the difference between APR and AER?
The financial world is filled with acronyms – and it often feels like they’re designed to bamboozle the everyday consumer. But you don’t want to confuse APR with AER (or, Annual Equivalent Rate). When you seer a financial product with an advertised AER, you know you’re looking at the interest rate for, say, a savings account. Or, to put it another way, almost the exact opposite of APR.
How do I get the best deal on my borrowing?
There’s not really such a thing as ‘the best APR’ – except, perhaps, 0%. That’s why you’ll often see commercials that range from about 15% to a whopping 4000% (these high costs are typically seen at payday loan outlets).
The APR tells you how much extra you’ll be paying over the lifetime of the debt, whether it’s a three-year loan or a 25-year mortgage. However, this means you may not be getting the best deal available, since rates can often change.
There are a few things to watch out for when comparing APRs from different credit providers. One of the more popular terms you’ll likely see is the term ‘representative APR’. This means that while the majority of those who applied for, say, a credit card, have been accepted at the ‘representative APR’, others will be paying a higher premium for their borrowing. In other words, there’s a chance you won’t be getting the same deal as the one advertised. Depending on the type of borrowing and the terms, it’s also possible to save yourself a bit of money by paying back more than the minimum.
The real problem is, since the APR varies for each applicant, you won’t know how much it’ll be until you’ve been offered the rate – and that application, whether you accept it or not, is going to end up on your credit report. In this case, it’ll pay to do as much research as possible – including reading all that small print – so you can make an informed decision before applying for credit.