If you are searching for personal loans, you must have come across the term “APR”. Finding the right credit product is often confusing if you do not understand the jargons. Before you decide to borrow a loan, get acquainted with the terminology and their mechanism, as that will help you in finding the product that may suit your preferences.
In this blog, we will learn:
- What does an APR mean?
- How is it different from an interest rate?
- How is it related to a personal loan?
APR stands for Annual Percentage Rate. It includes all the fees and costs that are involved in securing a Personal Loan. This rate is represented in percentage, and it comprises of broker fees, origination fees, discount points, and other associated costs. It can be greater than or equal to the nominal rate of interest. Different lenders may offer different APRs. Choose the offer that gives you a lower APR as you will save some amount of money on interest. It is calculated yearly and not monthly. In other words, it is the annualised rate that helps you to evaluate how much you will pay on interest if you borrow it for a year. However, it doesn’t include late fees, early repayment penalty or any other circumstantial fees.
A rate of interest is the cost of borrowing the principal loan amount. There are two types of interest rates – fixed and variable. With a fixed rate of interest, a borrower has to repay the loan in fixed monthly instalments. While with a variable one, the monthly instalments will vary as per the rate of interest. It doesn’t take into consideration the other associated costs of procuring a loan. If you find a loan that doesn’t have any additional costs then, the Annual Percentage Rate and the interest rate for that credit may be equal.
When you consider borrowing a loan, you must always compare the loans by the APRs. Suppose, you have applied for a Tenant Loan and you get several offers from lenders who are quoting different APRs but same interest rate. Choose the lender who is offering you the lowest APR. You might be wondering how it affects your loan rate? Remember, the higher the APR, the higher the repayment amount. Listed below are three major factors that influence the APR:
- Credit score and history
- Debt-to-income ratio
- Length of the loan
Compare the options based on their APRs to find and choose the best credit product according to your financial needs and affordability. Follow five simple steps to calculate the Annual Percentage Rate:
- Add up the fees and interest you would pay over the complete tenure of the loan.
- Divide the result that you get by performing STEP 1 by the loan amount that you have taken.
- Multiply 365 to the result you obtain by performing STEP 2.
- Divide the result that you get by performing STEP 3 by the total number of days in the tenure of the loan.
- Multiply the result you obtain by performing STEP 4 by 100 to get the APR.
Understanding the mechanism of the APR and interest rate is crucial for you to make the right financial decision. Also, knowing this helps you in comparing the loan offers appropriately. A lender will only let you know the APR that is available to you when you apply for a loan. However, there are a few lenders in the United Kingdom who conduct a soft credit check to offer you the initial quotes. A soft credit check doesn’t hurt your credit score. A hard check is mandatory by the law and is conducted by the lender before giving their final decision.
Loan Princess is an FCA authorised loan broker that deals only with regulated lenders. Our process of application is simple and doesn’t take much time. Click Here to know what APRs you will be offered if you Apply for a Loan.