What is APR: Get the Best Out of Your Borrowing

what is APR stands for Annual Percentage Rate

What is APR rate and how does it work? Annual Percentage Rate (APR)  is something you may never have considered in your entire lifetime, let’s face it, it’s not the most interesting subject. But getting to grips with APR is essential in helping you borrow more wisely and securely.

So what is APR? APR stands for Annual Percentage Rate. It is a calculation of the yearly amount of interest and associated charges (mortgage arrangement fee or credit card annual fee) you will pay on top of the amount you borrow.

In it simplest terms, APR is the cost of borrowing for a year. All lenders have to tell you their APR by law and the rates vary from lender to lender.

How to Calculate APR

The easiest way to calculate APR is to use an online APR calculator such as the ThisIsMoney APR calculator.

For example: You skip down to the Kind and Simple Bank (ahem) for a credit card. They give you a card with an APR of 17%. You go on a spending spree and run up a debt of £1000 on your new card. So the overall amount you will pay back on that debt is £1094.46.

OR if the Lovely Simple Bank also offers you a personal loan of £5000 with an APR of 6.9% to pay back over 3 years, then the whole amount you will pay back is £5,532.48.

Sounds quite easy doesn’t it? Hmm….perhaps too easy. APRs can be helpful when comparing different deals. However, there are some things about APR you need to know first.

OK firstly, there are actually two types of Annual Percentage Rate (APR):

1. Your Personal APR

This is the easy one. It is the rate advertised and the one you will get if you are accepted. The true rate of interest you will pay on top of your borrowing. End of.

2. The Representative APR

Much trickier. When a Representative APR is displayed alongside some types of borrowing (credit cards, personal loans), this means that 51% of successful applicants will be given the stated rate.

But the other 49% of applicants could get a different, usually higher, rate. And some applicants will be rejected outright. Who actually gets the Representative Rate advertised will depend on credit score and financial status.

APR: How to Get the Best Deal

So, how do you use APR to get the best deal and make sure you don’t end up paying more than you should? We’ve got your back. Here are some helpful tips and tricks about APR that will help you to borrow with your eyes fully open….

1. Check the Small Print

Because, in some cases you won’t get the advertised Annual Percentage Rate. It’s that pesky Representative APR again. It may seem attractive but you might not get it, particularly if your credit score is less-than-healthy.

Unfortunately, you will only find out which rate you are actually getting once you have applied (leaving a ‘footprint’ on your credit history).

This is especially true with credit cards so be eagle-eyed about the APR on the final paperwork. REMEMBER a lower credit score = higher APR.

Before you apply for a credit card or loan check out fantastic Money Saving Expert Credit Card eligibility tool. It doesn’t affect your credit history and will give you an idea of whether you will get the rate advertised.

2. Beware of Banks Touting MONTHLY Interest

Some banks and credit card companies quote a very low monthly interest, say 2%. Sounds good doesn’t it? However calculate that monthly interest over the year and you end up with a whopping 26.8% APR.

This is the actual rate you will pay. So with this rate, your £1000 would turn into £1268 to pay back over the year. Not so small now eh?

If the rate advertised is monthly, use this Stoozing online calculator to make sure you know what ANNUAL rate you are actually getting.

3. Watch Out For Promotional Rates That Are ‘Variable’

A credit card or loan company can draw you in with a low APR rate. However if that loan has a VARIABLE rate this means that after the term of the promotion ends, the APR can rise significantly.

So, if possible, look for a fixed rate. It may have a higher APR but at least you know what you’ll be paying in the long run.

4. Mortgage APRs – Ignore Them!

The APR displayed alongside a mortgage can be more confusing than APR on credit cards and loans.

The APR on a mortgage shows you an average annual rate that you pay over the (usually) 25-year term. This average is calculated by taking into account any initial fixed rate deal and the variable rates you pay after the deal ends. But you may never pay this ‘average’ rate.

Average APR rates are not helpful; you need to know what you are really going to pay every year. So if you sign up to a fixed-rate deal of 3.5% for two years, which then jumps up to the Standard Variable Rate (SVR) of 4.8% afterwards, these are the rates you need to focus on, not the average APR.

Then you can make a decision of whether to stay with your existing lender or shop around for a better deal.

5. Watch out for APRs on Balance Transfer Cards

OK, you’ve done a fantastic thing. You’ve transferred your existing debt to a credit card with a 0% APR on balance transfers.

You’ve set up a payment system to pay off this debt before the promotional 0% rate ends. You are very, very sensible.

Then you have a moment of madness – you make one purchase on your balance transfer card without paying it off. Disaster.

You will be charged, not the 0% APR on new purchases, but upwards of 27% APR. It’s how they reel you in. So after you have transferred your balance and set up your payment system, CUT UP THAT CARD!

6. Be A Clever Borrower – Pay It Off

If you pay off your entire credit card balance each month: you can completely ignore APR. You will only be charged interest on accruing debt so if you pay off your full balance monthly, you won’t get hit with the interest. This is clever borrowing and will stop you getting into debt.

ALWAYS remember that the longer you borrow for, the quicker your debts will grow. If you miss one payment, or just pay the minimum amount on your balance you will be charged interest. So pay it off every month.

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Always remember that the most difficult part of getting out of debt is getting started!

Over to You

Have you been misled by a ‘low APR’ deal? How has borrowing and paying off the interest affected your finances? Do you have any tips for people thinking about taking out a credit card, loan or mortgage?

This post is part of the Debt Management series, you can read all posts in the series here.

(Photo credit: Got Credit)


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  1. We were lucky to lock into a low APR for our home. We bought three years ago, just before a bit of life came back into the housing market. However, I think it’s easy to feel that just because you have a low APR, you should be fine with the debt. We’re definitely working to pay off our mortgage early. Anyone who has run the numbers through a calculator can see how significant early payment is. These tips are really important. I have lots of friends who could use a peek at them!

    1. Hi Penny, thank you for sharing your experience with us. It is really advisable to pay off your debts as early as one can possibly can. You are lucky to have a low APR. Most people aren’t that lucky. One great way to get the best interest rates is to be an informed customer.

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