APR - Annual Percentage Rate
It is possible to compare the different credit offers by checking the Annual Percentage Rate (APR). The APR is the total charge for credit for each year of a credit agreement. It is given as a percentage but takes into account other charges in addition to interest and also takes into account the period over which the interest and charges are to be repaid.
The interest payable on the loan is calculated on a daily or monthly basis. Each time interest is payable on the loan it is charged not just on the initial amount borrowed but also on the interest previously added to that sum.
By law all lenders must reveal their APR before an agreement for credit is made. APRs differ between lenders. Some companies will advertise both the normal interest rate (the amount to be paid each month or each year) as well as the APR. It is the APR which should be noted as it reflects the true cost of the borrowing.
However, the APR is itself problematic. It can be different depending on the repayment terms available. A shorter repayment period can attract a higher APR.
Rates vary to such an extent that it pays to shop around as it is possible to save hundreds of pounds in interest payments by choosing the lender who has a loan with the lowest APR.
The APR may also be fixed or vary which means payments could go up or down.
In the case of credit cards and store cards the APR does not take into account the cost of cash advances (withdrawals from cash machines) or balance transfers.
The general rule is that the lower the APR the less you will have to pay in interest. However, it is important to check whether there are other charges which have not been included in the APR such as optional payment protection insurance, arrangement fees, or a broker's fee as these will increase the total rate of interest. Most companies advertise the "typical APR" as an indication that it may vary depending on the way in which the credit is used.
The simplest way to view the APR is to compare the percentage to the pound price. For example, an APR of 25% means the lender will charge £25 for each £100 borrowed, add to this any other charges not included such as arrangement fees and this form of credit becomes a very expensive option.