Whenever you borrow money, the amount you will have to pay back depends on the rate of interest that applies. When you look at adverts or best-buy tables for loans, credit cards and mortgages, the level of interest is normally given in terms of an APR, which stands for annual percentage rate.
What’s the difference between the APR and the interest rate?
Often there is not much difference at all. But the APR is intended to show what the average rate of annual interest on a loan is once any extra fees are taken into account.
Lenders are obliged by law to show an APR (specifically a representative APR – see below) so that consumers can make a fair comparison between different deals. As of this year, the interest rate shown for mortgages is now known as the APRC, which means the annual percentage rate of charge. This may also include the impact of charges such as the initial administration fee, but it is essentially the same as the APR.
What is a representative APR?
The representative APR on a loan – sometimes referred to as the headline rate – is the one you’ll find on ads, on providers’ marketing materials and in best-buy tables. This is the rate that most customers (51% or more, by law) will pay – but with personal loans and credit cards, the actual APR each borrower pays depends on their credit score.
What this means is that, if you are accepted for a loan or card, you may be charged a higher rate than the representative APR you have seen advertised. (Mortgages work differently: you’ll either be charged the representative APR or your application will be turned down.)
What are my chances of being given the representative APR?
This largely depends on the state of your credit record. If you have a decent history of responsible borrowing, with no missed payments or defaults, you are far more likely to be considered a good risk and therefore given the lowest APR available. It is well worth checking your credit file before making any applications.
Some lenders will let you make a preliminary check to see how much you may be able to borrow from them and at what rate prior to making a formal application. This can be valuable because making a string of applications in a short period of time can have a negative impact on your credit record.
Other factors to watch out for
Be sure to check what size of loan any advertised representative APRs refer to, and how long the loan is supposed to run. If you want to borrow more or less than the amount used to calculate the representative APR, for example, or if you want to borrow over a shorter or longer period, your personal APR may be different regardless of your credit score.
Most lenders give representative APRs for different sizes and lengths of loan on their websites.
Find out more about Zopa loans.