What Is APR And Why Should You Care?
Updated: Nov 27, 2020
Essentially, APR (Annual Percentage Rate) is how much it costs to borrow money. It is the interest rate stated as a yearly figure. As well as the interest you pay on your credit, APR includes any compulsory fees and other charges such as admin fees or broker fees, however, it doesn't cover all fees or add-ons such as Payment Protection Insurance (PPI). Always make sure that you check the terms and conditions when considering a product with an APR.
Lenders are required by law to show the Representative APR rate on any consumer credit agreements. If you are comparing loans or credit cards, then APR is an important factor to look at as part of your decision.
A loan from one lender may have lower interest rates than a loan from another, but the fees with the first may be higher. If you only compare interest rates, the first lender could look like the better option. But, when you compare APR, the interest and fees are included, so you may find that second lender is the better option overall.
Why should you care about APR?
It’s super important that you’re aware of the APR you’re paying on any debt you take out, because it’s the price you pay to borrow the money.
In general, you may want to stay away from debt with high APRs, as the interest payments could end up overwhelming your budget. But even if you manage to find debt with low APRs, taking out too much debt could cause you problems.
What is the difference between Representative APR and Personal APR?
It’s likely that you've probably heard of a couple of different terms when it comes to APR, 'Representative' and 'Personal', and so it's easy to get confused between the two.
In short, Representative APR is the advertised rate which the majority of the provider’s customers will be eligible to receive, whereas Personal APR is the rate which is specific to you as an individual applicant. This means you could either pay more or less than the Representative APR figure advertised by the provider, but this will be determined by factors such as your credit score.
What's a good APR?
Well, that’s a matter of opinion, and it’ll almost certainly depend on your financial history and credit score!
Generally speaking, when it comes to loans, the more your borrow, the lower your APR will be. Credit Cards meanwhile will have rates which vary anywhere between 0%, often as a promotional introductory rate, to nearly 40% in some cases, but the average APR for credit cards in the UK is around 22%.
If you receive a promotional rate, such as 0% on Balance Transfers or Purchases, it’s absolutely vital that you stick to the terms of the agreement, and make your repayments on time, otherwise you could see that attractive promotional rate retracted and you’ll have to start paying interest. Finally, if you do get a deal on your APR, try and pay off the credit card before the offer period ends, as this will ensure that you avoid paying more than you have to. If this is not possible, consider transferring to another 0% balance transfer card, but only if you have had the current one for more than two years otherwise you could see a negative impact on your credit score.
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