What is APR?

Kelvin has decided he needs to buy a car. He thinks having a credit card will help him achieve that. While talking to Anna, she mentions that he needs to compare the Annual Percentage Rate (APR) for the lenders he’s considering. Kelvin wants to know more about APRs. 

You may be like Kelvin, considering making purchases with a credit card or taking a loan from a lender. You need to understand the rates offered by your lender before you get into taking a credit card. You don’t want to wake up to surprises on how much you have to pay when the charges begin to come.

An Annual Percentage Rate (APR) is the charge accrued to you yearly on your credit card or the money you borrow. In simple terms, how much extra you have to pay back on loans and purchases. This is determined mainly from the advertised APR of your intended lender and your credit score. If you have a bad score on your creditworthiness, you’re likely to have a high APR from your lender. There are special loans for very bad credit.

APR is represented in two major ways: Representative APR and Personal APR.

Representative APR gives you a clue to the standard APR charge of a lender with regards to credit cards and purchases. Personal APR tells you what the lender will charge you which doesn’t necessarily coincide with the charge on the representative APR.

Representative APR

When applying for a credit card, it’s always safe to compare the rates of different lenders. You can find this comparison on a credit broker site like Dot Zinc Limited. Credit brokers help link you to lenders and provide you with information about these lenders so that you can make a good choice.

The Representative Annual Percentage Rate on a lender’s advert shows the rate they offer to about 51% of their clients. This also means that you are not likely to get the same percentage. Your rate will be often higher against lower than the advertised rate. The rate also represents the percentage you will pay for £1,200 every year. Some lenders charge an annual fee in addition to their APR.

Here’s a typical example.

One lender offers 25.9% (variable) advertised APR on their site with 0% purchases for 3 months. This means that they charge 51% of their clients 25.9% APR every year at £1,200. If you have a good credit score, you may as well receive a 0% APR on purchases for 3 months. Because this score is only a representative, you have 1 in 2 chances of being charged at this rate. Depending on how good you are on credit, your personal rate may not go too far from this advertised rate.

Another lender may advertise a lower APR and attach an annual fee to it. For example, 20.9% representative APR and £100 annual rate. But one thing to note is that the representative APR does not say anything about the benefits that a lender offers and the charges on other transactions on the credit card such as balance transfers or cash withdrawals.

Other charges not represented by the APR include the credit limit your lender offers you based on your eligibility, late payment, and fees paid by default. The credit limit varies between different borrowers and the circumstances of borrowing credit. You will do well to look closely at the terms and conditions before you make any credit/lender decisions.

Personal APR

The APR your lender offers you based on your particular situation is your personal APR. It depends on the amount of money you intend to borrow, the history shown on your credit form, and your financial position. If these factors do not match their criteria for the representative APR, you will get a rate calculated to match your situation.

APR accrues to credit cards and loans. For credit cards, when you borrow, you can pay off at once at the end of each month or you can pay it off in instalments. Usually, paying off your debts at the end of each session will save you from paying any extra rates like APR. Paying install mentally means that the APR applies to you monthly as you pay off your debt. Plus, you have to pay off the bill before the payment period expires if you must show yourself as being creditworthy.

APR charged on loans differ from those on credit cards. Credit cards are often offered for small loans of £100 £200 and £500 pounds. Supposing you want to buy a car of £10,000, you’ll be better off taking a loan because the APR over time will be easier to deal with. APR also accrues to hired purchases. 

Lenders only begin to check your Annual Percentage Rate after you submit an application. Some offer you some hint to determining if you are eligible for their representative APR or not. If you are not, it’s often safer to assume that you may get a rating that is higher than what they have advertised. They’ll also charge a certain fee for the processing before they issue you the card.

Variables That Affect Your Personal APR

The values that go into calculating your personal APR include:

Interest rate, the processing fee charged by your lender, charge period (which can vary as yearly, monthly, or weekly), and other charges that compulsorily accrue to the loan. 

A lender would go through your credit portfolio to see how credible you are and how much you falter with repayments. With this, they decide what rate to place you at. If you have been faltering much lately with your repayments (which include contracts on mobile phones), they will be more likely to place you at a higher rate because you represent a high risk to their business. If you don’t want to build up higher APR payments you will be better going for a short term loan.

On Credit Score

You need to manage your credit worth intentionally. Lenders intend to make money from their business so they are less likely to want to take on anyone with huge debts or that represents a huge risk. It also means that in the case they decide that they want to risk it, you will have to pay higher. In some cases, you may be charged as high as 30% more than the representative APR. 

Simple ways of regulating your credibility include paying off your debt at the end of each charge period if you are using a credit card, paying your loan as at when due, and ensuring you don’t falter with deadlines. Life happens now and then, but a conscious effort will help you stay on a good track. Even with a poor credit score, you can get a quick loan, sometimes on the same day.

Frequently Asked Questions

Is there a difference between Interest Rate and APR?

Think about it like this:

There’s a set market interest rate for every lender to work with. This interest rate will vary over time. Also, your lender has to take on risks to provide you with the money you want. Those risks may include paying back the money before the agreed time of your repayment, credit charges, etc. 

The money you borrow is called the principal. The extra charge on it by the market standard is called the interest. This interest is charged as a percentage of the principal. So, suppose you borrow £10,000, the market interest may require you to pay back 10% of £10,000 along with the initial money. In simple terms, you’ll be paying back £11,000.

However, the risks which your lender has to take on your behalf impart the amount of interest he charges you. Suppose he takes risks that accrue to £200. This is 2% of the principal he lent you. When he adds his risk to the market interest rate, he now has to charge you about 12% interest rate. This makes the APR charge for a lender. 

Will I be charged the same APR for the period of payment?

Now, because market interests change alongside risks, APR to changes. Most lenders will denote their representative APR as a variable. This means that it will fluctuate as the market interest rates and other factors fluctuate. Sometimes, it may fluctuate in your favour and you pay a lot less. Other times, it will go way higher causing you to pay more.

Why do I need APR?

It’s important to regulate businesses such as lending to prevent any lender from taking undue advantage of their clients. APR helps you see how effective the regulation works for you because you can tell how the lending company is serving you. The APR shows you what the market interest rate says as well as what other charges the company accrues to you.

Because every lending company works with the same interest rate, you can see what each lender is offering you through the APR. You can easily compare the values between different lenders to decide which one works better for you. Even though APR does not show every detail of the charges associated with the loan, you can tell the basic services which they are charging you for.

What are the APR charges on my credit card?

When calculating APR on a credit card, lenders assume that you want to borrow £1,200. They also assume that you want to spend this money in one day and pay it back over some time (i.e. 1 year). In most cases, they have a set annual fee for their clients which represents the risks they take to lend you money over one year. This annual fee is calculated as a percentage of £1,200.

Your lender adds the interest rate to their risk rate to make up their APR charge for your credit card. So, late payments, withdrawal charges, and charges for overdraft are not included in the advertised APR. They are more or less hidden APR charges that are determined according to individual usage and the contract with your lending company.

Do I have to pay any interest if I pay my credit balance on time?

APR is charged on credit card balance when you have to pay back install mentally. This means that when your lender sends your bill at the end of a charge period (say, one month) and you pay off in full, you don’t have to pay any interest for the money borrowed.

This doesn’t mean that you don’t have to pay for the credit card you own. Credit cards cost money and in some cases, you have to pay an annual fee to maintain it. 

Is 0% APR beneficial to me?

Some lenders may advertise 0% APR on their loans. These are usually given for purchases and as a means to buy the interest of the borrower before they revert to variable APR. While 0% APR might have such hidden charges as inflated prices, they often help a borrower who intends to make purchases within a period while holding off interest rates for that time. In general, 0% APR can be very beneficial to you if you can figure that the purchases don’t come at an inflated price and if you already have high expenses to make within a given period.

What is the difference between fixed APR and variable APR?

Variable APR represents charges that fluctuate with market interest rates. It means that if the base interest goes up, your lender will increase the rate they charge you and vice versa. With fixed APR, your lender has to keep the bargain of the charge they signed with you irrespective of whether the base rate goes up or not.

Fixed APR and variable APR can both go in the favour of the borrower or the lender over time.

Is there a difference between APR and APRC?

Yes. APR is used for unsecured loans such as credit cards while APRC is used for secured loans and mortgages. Unlike APR, APRC ( or Annual Percentage Rate of Charge) requires the lender to state entirely the rate accrued to the loan or mortgage for the entire period of the loan. However, this rate does not stay steady since the base interest rate may change over a period.

Just like APR, APRC may have fixed or variable interest rates. A fixed-rate will stay steady even if the market rate changes but a variable rate will change with standard rates.