Defining Loan Terms: What is APR

The world of money and personal finance is full of strange acronyms and confusing terms that can be difficult to grasp for those of us who don’t have a background in the banking industry. Unfortunately, when you want to make sure that you’re getting the best possible deal for your circumstances, knowledge and a deeper understanding of these terms is absolutely crucial. “APR”, for instance, is one of the most important acronyms you can get to know when you’re trying to decide which kind of loan or financing agreement is right for your needs.

Luckily, there are plenty of simple ways to answer the question of “What is APR?” The first and most convenient way to look at the term is like this: APR is short for the phrase annual percentage rate. In other words, it refers to the annual amount of interest that you’re going to have to pay if you want to borrow from a particular lender or union. In most cases, you’ll see an APR advertised on almost any borrowing product or service available on the market, regardless of whether you’re looking at mortgages for your home, car loans, or even credit cards.

Explaining the Annual Percentage Rate, or APR

When you borrow money from a bank, building society, credit union, or any other type of lender, you’re expected not only to pay back the money that you borrow, but the interest that accumulates between the time that you receive the cash, and the time you pay it all back. The APR is the annual amount that you will be charged to borrow the money that you need, and any financial product that lends you money is required to show an APR to help consumers fairly compare different products and make decisions based on their needs.

To help keep things as balanced as possible, APR is often calculated the same way by all different lenders, and it can often take various factors, such as additional fees and the frequency at which interest is charged into its determination. This often makes it much easier for consumers to compare the different financial products available on the market side by side, in order to determine which is the most financially beneficial.

Calculating APR: How to Know What You’ll Pay

If you’re still feeling a little confused about the concept of APR, perhaps the best thing to do would be to use an example to explain the phrase further. For instance, if you borrow around £1,000 on a credit card with approximately 12% APR, during one year, you’ll have to pay £120 – if you pay nothing else back towards the original cost of the loan.

Of course, in most cases, you’ll find that any loan will require you to at least make minimum repayments that make up the cost of the money that you have borrowed, so the total amount of interest that you end up paying throughout the course of the year would actually be less than £120 in the example we have used above.
In most circumstances, APR is included within a debt on a monthly basis, so if you want to find your interest rate each month, all you need to do is divide the APR by 12. For instance, if your APR is 12%, then you will have a monthly rate of 1% interest every month.

What is Typical or Representative APR?

Although APR is the rate that is paid on any loan or credit, how providers actually advertise that number is a little more complicated than you might expect. Often, APR is advertised either as a representative or typical APR. To best describe these terms, a representative APR is simply what you’re likely to see when you view a commercial for a loan or credit card, but it doesn’t necessarily outline the actual percentage you will be given.

It’s important to remember that a representative or “typical” APR is advertised as the rate that around 51% of people who apply for the loan and are accepted will be required to pay. That means that almost half of the people taking out a loan will actually pay a higher, or different APR to the one that was advertised.

How to Get the Best APRs

The biggest problem with representative or typical APRs is that you really don’t know what kind of rate you’ll be dealing with until you apply for the loan in question. However, every time you fill out an application, you leave behind a mark on your credit file. This means that it may be unwise to apply for too many products within a specific time period.

Usually, the only thing you can do to protect yourself is read through the small print and be aware of the circumstances that you’re getting into. For instance, the APR advertised could be dependent on your ability to fulfil certain conditions and meet certain criteria regarding credit score amounts.

Options for Loans: What Can You Access?

If you’re thinking of borrowing money to help you pay for an important purchase or simply make ends meet for a particular bill, then it’s important to know that you have a lot of different options available to you. Of course, just because there is a host of different solutions out there, doesn’t mean that they’re all automatically ideal for your specific needs. If you want to avoid paying out too much cash at once, or ensure that you’re looking after your future, then you need to evaluate all of your options and find out which one is best for you.

To make the decision of choosing between loan options easier, you’ll need to look at what each choice entails, and how much you’re likely to spend before you decide what you should do next. Here, we’ll take a look at some of the different ways that people can borrow, so that you can get a better understanding of how each solution works, and what might be best for you.

Credit Cards

In simple terms, credit cards work on a system of something that’s known as “revolving credit”. This simply means that if you have a particular credit limit, you’ll be able to choose to borrow anything up to that limit on your card at any given time. Once you’ve reached the limit on your card, you won’t be permitted to spend any more on your credit card until you’ve paid off at least some of what you have already spent.

The amount of credit that’s available to you on any card will depend on a lot of different factors and circumstances. For instance, you might find that you can only access a small amount of credit if you have a bad credit history.

Personal Loans (Unsecured Loans)

Unsecured loans or personal loans are a great way to borrow cash for larger bills or pay-outs over a specific amount of time. If you already have debt, perhaps on your credit cards that come with a large APR, then a personal loan could be a great way to consolidate how much you borrow. The interest rate will be set when you take out the loan to begin with, and the repayments will remain the same for the full term of the loan. On personal loans, interest rates tend to be lower than what you would expect from credit cards, except for when it comes to borrowing small amounts. Most of the time, loans will become cheaper the more that you borrow, up to a specific cap.

Loans from Credit Unions

A lot of people assume that they need to get their loans from banks, but the truth is that there are a host of different options available. For instance, loans from credit unions are often much cheaper than the loans issued from other providers – particularly for small amounts, and there’s no threat of things like administration costs, set-up fees, or early fees on redemption.

Often, most credit union loans will cost around 1% a month levied on the balance of the loan, while some credit unions charge more than this. However, the law dictates that the amount of interest charged by a credit union cannot be more than 2% per month.

Websites for Peer to Peer Lending

Websites for peer-to-peer lending are designed to connect savers with cash to offer, to borrowers who need to access extra capital. Often, the rates offered by these websites are far more competitive than the one that you might see at a bank. However, they also come with less protection and more risks to worry about.

If you’re thinking of using a peer to peer borrowing service, it may be a good idea to do as much research as possible in advance. This way, you’ll reduce your chances of falling victim to increased debts, and greater financial problems than you might have had when you first began. The more informed you are, the better.

Borrowing from Pawnbrokers

Finally, to most people this is a very outdated option for lending in today’s society, however it’s still something that people use today when they need to access cash for a short amount of time and they don’t want to worry about the stress of payday loans. Basically, pawnbrokers give you money in return for an item that you “pledge” or provide as a sort of security. Usually, this might be jewelry, or something of specific value.

The benefit of this option for borrowing is that you don’t necessarily need a good credit history. Because your loan is secured upon the item of value that you choose, which your pawnbroker will be able to sell if you default on your loan, they have something to protect them from risk. Often, the term of a pawnbroker loan will be around six months, though it can sometimes be longer. Additionally, you can choose to pay off the loan whenever you like to get the item back.

How to Choose the Right Loan for you

If you have made the decision to borrow some money, then it is a good idea to consider the different loan types and which will be the best one for you. Think about how much you want to borrow, what you want it for and what size of repayments you can manage as this will have a big influence on your decision.

Different loans are designed for different purposes and so you will need to think about which one you need. It is worth finding out a bit about borrowing and types of loan so that you can make the right decision. If you are not confident in doing this, then it can be a good idea to pay a financial advisor to help you. They should be able to explain all of your options to you, let you know which are likely to be the best and which look to be the cheapest option for you. This can take out all of the hard work, but you will have to pay the advisor. Although they could save you money, some people would rather do the work themselves or if the loan is only for a small amount the amount of money that you save may not be enough to cover the fees of the advisor. It is really worth considering using one though as they will save you a lot of money as well as time.

If you do want to do the work yourself then you will need to be prepared to do some research. You will need to know all about the different types of loans that are available to start with and then you will be able to pick between them. You will choose according to how much money you want to borrow, how long for and the term that you want to pay it back for. You will be able to eliminate some loan types immediately as they will not be at all suitable for your needs, but you may find that a selection will suit you.

You will need to consider what you want from a loan. This is not just about how much you need to borrow but also how long you want to pay it back. This can make a big difference and if you have a longer term on the loan it can mean that you will end up paying back more money, but it could mean that you will find it easier to manage the repayments. It is very important to consider this, think about how much the repayments will be and how much money you have available each month to be able to pay for them. Also think about the future and whether you will be able to keep this up for the whole term of the loan. Consider what might happen if you do not have enough money to cover the cost of the loan.

The amount you borrow is really important to. The more you borrow, the more expensive the loan will be. Although the interest rate may be lower on a bigger loan, because of the longer term, it will mean that the actual amount that you pay; in monetary terms, will be higher. So make sure that you calculate what the total cost of the loan will be, including any fees as well as the interest rather than just comparing the interest rate. It is important when you are comparing lenders too, to make sure that include the cost of any set-up fees and charges as well as looking at the difference between the interest that is being charged. Make sure that you borrow the smallest amount possible so that your cost is the lowest that it can be.

Of course, although cost is a huge factor, you also need to consider other things as well. You may like to go with a trusted lender, someone who is recommended or that you know, for example. You may want to make sure that they are flexible so that if you need a payment break or want to change the amount the payments are or extend the term. If your circumstances change, you could find that you need to do one or all of these things and it is worth knowing whether the lender is likely to be up for a change like this.

There are a lot of factors to take into account as well as this, you may want a well-known lender, one you already bank with, one that is ethical, has a good reputation, does work in the community, has a branch in your local town or many other things. There are lots of reasons why an individual may choose one lender over another. Cost tends to be the biggest influence but there are these other things as well, which could have a bearing on the decision and are always worth considering.