Apr’s are confusing aren’t they;
APR stands for the Annual Percentage Rate of charge. You can use it to compare different credit and loan offers. The APR includes important factors such as:
• the interest rate you must pay;
• how you repay the loan; the length of the loan agreement (or term); frequency and timing of instalment payments; and amount of each payment;
• certain fees associated with the loan; and
• premiums for payment protection insurance that the lender chooses to make compulsory.
All lenders have to tell you what their APR is before you sign an agreement. It will vary from lender to lender. Generally, the lower the APR the better the deal for you, so if you are thinking about borrowing, shop around.
Example 1:
If you borrow £1,000 for one year at 20% interest, and at the end of the year you repay a lump sum of £1,200:
• you will be paying an interest rate of 20%; and
• the APR will also be 20%.
Example 2:
If you borrow £1,000 for one year at 20% interest, and pay throughout the year in equal monthly instalments (12 x £100 = £1,200),
• you will still be paying an interest rate of 20%; but
• the APR, however, will be roughly 40%.
Example 2 is more expensive because you are paying back the £1,000 gradually throughout the year. In Example 1 you have the benefit of being able to access the £1,200 for the whole year, which you could invest and earn interest on. By paying in instalments you're losing out; this increases the cost of the loan - hence the higher APR.
Mind you, I have seen short term loans with an apr of 1,800% odd, now that is high..
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