APR can make it pretty confusing to work out exactly how much interest you’re going to repay. We’ve outlined what APR is and what it all means.

You will see the term ‘APR’ used on a range of different lending options including credit cards, overdrafts, loans and mortgages.

In the UK it is a legal requirement to show the APR on financial products to make it easier for people to compare prices. However, it can be a bit confusing because there are two types of APR – Typical APR and Personal APR.

So what is APR?

The annual percentage rate (APR) is the rate used to show you the cost of borrowing.  The APR will take into consideration such things as the interest rate, the frequency with which interest is charged and any other charges associated with an offer of credit such as arrangement fees, or annual fees. 

All lenders are required by law to tell you what their APR is before you sign up for a credit agreement with them to aid transparency.

What the APR shows you is how much your loan or borrowing will cost over a year, for the duration of your debt.  

What is Personal APR?

As we stated above, there are two types of APR, Typical and Personal. The Personal APR explains the percentage you will pay under your own circumstances. So for example, if you took out a mortgage, in general, it will be the same APR that the lender will advertise. 

The lender will either accept your application at that APR or they won’t because the APR rate will not change no matter what happens to your credit risk profile.  

What is Typical (Representative) APR?

The typical or ‘representative’ APR is the rate of interest charged on financial products such as credit cards and loans. 

Usually, the advertised typical APR is a rate that a minimum percentage of accepted customers will pay. Currently, the minimum percentage is set at 51% in accordance with EU rules, but this may change once the UK leaves the EU.  So that means credit card providers only need to give their advertised APR to 51% of customers that apply. 

Lenders are required to show a ‘representative APR’ in their advertising material so you can get an idea of what you may be paying back, although you will never know exactly what rate you will pay until you have been accepted for your loan or credit card.

The typical APR may also differ depending on the size of the loan you need. For example, a loan between £1000 and £3999 may be charged at 17% APR but a loan over this amount may be charged at 12%. 

Based on your credit rating, your personal APR may be different from the typical APR that the lenders advertise.  

What is a good APR?

The most favourable APR rates will often come with higher loans, so the more money you borrow, the lower the APR will be. 

You will see that with credit cards, the rate you are offered will usually bear on your credit score, but can be anything from 5% to over 30%. Rates will also vary on how you use your card, so making online purchases or shopping in-store will be different to rates charged on making cash withdrawals.

Are 0% APR balance transfers good?

Credit cards often run 0% APR balance transfer options for a promotional period. These promotional periods can last anything from three months to 40 months. This means that you can make a saving by transferring an existing debt from one card to another offering this deal. 

To comply with the offer it is important that you stick to the rules and make sure you pay in full and on time each month, otherwise you could lose the promotional rate. If you cannot pay off your card in full by the time your promotional period expires, then your debt will be moved to a standard variable rate.

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