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.