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Home > Money Blog > Financial Guides > What is an APR and What Does It Mean? Find Out Here

What is an APR and What Does It Mean? Find Out Here

What is an APR and What Does It Mean?

What is APR?

It’s a common question – just what is an APR?  It stands for Annual Percentage Rate. It’s a feature that you will always see quoted whenever you are looking to borrow money.  It doesn’t matter if you’re borrowing via a personal loan or credit card, businesses will always quote an APR.  You’ll even find one at the bottom of this web page.  Lenders have to display one to make it easier for customers to compare products.  Basically, the only time an APR isn’t available is when you visit the Bank of Mum and Dad or borrow from a friend.

High or Low APR?

It’s not like a cricket score!  In general terms, the lower the APR, the better.  You may have less interest to pay over the period of your loan, so it could cost you less to repay overall. A major contributing factor for low rates is the link to those with good credit ratings.  If you only have a ‘fair’ or ‘poor’ credit rating, you are unlikely to have access to the lowest rates. You may end up paying more.  The higher charge from lenders is because you could be seen as a bigger risk.

Representative APR

Representative APR is the term that you will commonly see next to advertisements for loans and credit cards. But what does it mean?  This is the rate offered to at least 51% of people accepted for the loan product that is being advertised. In simple terms, if 100 people were accepted to borrow money – at least 51 people must be borrowing at this rate or below. Therefore 49 out of the 100 people accepted would be borrowing at a different, higher rate.

Give Me a Simple Example

To keep it really simple, we’ll take a look at what it would cost if you borrow £100 for 1 year at different APR’s:

A £100 loan at an APR of 20% for 1 year would have a total cost of £120 or £10 per month for 12 months.

A £100 loan at an APR of 50% for 1 year would have a total cost of £150 or £12.50 per month for 12 months.

As you can see, over the same loan term, the lower the APR, the less money that you need to pay back in total. Building a strong credit history is a heavy influence over being offered a lower rate. Impact on a Credit history can come from many places – everything from late payments to County Court Judgments (CCJ’s). Money saving guru Martin Lewis recommends that you should keep a close eye on your credit history to make sure that all the information held on there is correct.  It could be the first step you take towards making credit history improvements.  You can check quickly and easily by signing up to one of the free credit checking services. There are many to choose from with Clearscore and Noddle being just two examples.

If your credit score is less than perfect you could check out our advice on bad credit loans.

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