APR – What you need to know

Many people, when under financial pressure and needing money in a hurry simply blunder their way into a loan product and end up paying the price when it becomes difficult to pay back the installments each month.

Unfortunately, this is as a result of them not doing their homework properly and not understanding various critical factors pertaining to credit. One such factor is interest rates. This determines how much interest you will pay on top of the original loan amount.

In this article, we will be taking a look at annual percentage rate (APR) in particular.

Definition of APR

Anyone that borrows money from a credit provider has an interest rate which is then applied to the amount that has been borrowed. This is added to the total amount which needs to be repaid and is the main way that these companies earn money. This interest is the APR. It is calculated as the amount of interest charged annually on the borrowed amount. It cannot be done away with and is something that will have to be paid.

Can APR change?

Yes, it most certainly can. In most cases, different financial institutions charge different APR ratings for their products. You could even take two of the same loan product from two different lenders and you will find that the APR is not the same. The APR rate is often set by the financial lenders themselves.

The representative APR rate seen in advertising for a credit product is the general rule of thumb of what most people will be charged. Each individual application however, is unique and the APR may go up or down depending on the applicant’s risk to the lender. Someone with a poor credit record and a history of missed payments might have a higher APR than the representative rate while someone who makes their payments regularly might actually receive a lower rate.

What affects APR?

The most important thing that affects the APR is each individual applicants credit score. As explained above, poor credit scores mean higher APR’s than good credit scores. That’s why it is so important to try and keep your credit score in a decent range.

Calculating APR

If a lender tells you the APR they intend to apply to your loan, it is possible to calculate how much it will cost to borrow money from them. So an APR rate of 5% on a loan of 1000 pounds means you will pay back 1050 pounds over the term of the loan. APR can be influenced in the following ways. Firstly, by paying back extra each month (more than the instalment) and secondly, by how long you take to pay the loan off. Check to see if you will be penalised for paying the loan off early, however.

Making repayments

Always make your repayments on time and pay the full amount. This amount will in all likelihood be fixed if you took out a fix rate loan. By paying even 10 pounds more a month, you could pay off your loan quicker, thereby saving on interest. As mentioned above however, make sure this is allowed by the lender without fear of penalties.