When comparing various financial products, you’re bound to see Annual Percentage Rates (APRs). They are designed to help you compare loans, and take out the product that is best for you. As such, it is helpful to understand them and their limitations to help you make decisions about which loan to go for.
What is APR?
APR stands for ‘Annual Percentage Rate'. It is the rate of interest that would apply if you borrowed for a whole year including costs you may need to pay, for example, arrangement fees.
APR helps you to compare the cost of different borrowing options on a consistent basis. Lenders are required by law to show the APR when advertising loans and credit cards. The APR can actually look quite alarming for short term loans that are not meant to be used for longer term borrowing so it also makes good sense to look at the actual amount of money you will pay each month and over the whole life of a loan so you can be sure that it is affordable.
For example, if you borrow £100 from MYJAR over 30 days you will pay back a total of £124.00, including £24 in interest charges. That’s 24% of the original amount, but because APR is worked out over a year rather than 30 days, the representative example displayed in advertising will be 1270% APR.
So, is APR Important?
As you can see, in the case of short term borrowing, APR is not really the best indicator of how much you will have to pay because the calculation was never designed with short-term loans with capped interest charges in mind. However, in the interest of helping people compare the pros and cons of different loan types from a ‘big picture’ perspective, it’s useful to have this level playing field within the industry.
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