Understanding APR and Representative APR

If you're looking to apply for a personal loan, one of the most important things you need to know about or investigate further if necessary is the concept of annual percentage rate or APR. APR is what will give you a rough but accurate estimate of the cost of your loan. Depending on the type of loan and your lender, APRs vary accordingly. It's very important to fully understand the concept before you sign any dotted line.

What is APR?

APR is the financial concept that most if not all lenders use to represent the cost of a personal loan product. It includes factors such as interest rate, fees and other charges as well as the length of time you need to pay back the loan. Take for instance logbook loans. The average APR for logbook loans is 400% while payday loans’ APR is set at about 1,000%.

As you can see, APR varies from lender to lender and from loan type to loan type. You can use the concept to compare similar loans then opt for the deal with the lowest APR because it means that the loan costs lower all in all.

What are the types of APR?

There are generally two types of APR in the market. One is called a variable APR while the other is referred to as a non-variable APR. Variable APRs, as the name suggests, is not constant. It is calculated by adding a number of different APRs as set by your lender or loan provider. The APR changes or varies up and down depending on your lender's update which may be carried monthly or quarterly.

Non-variables APRs, on one hand, are more stable and constant than variable APRs. Even if your lender claims or advertises that they have a non-variable APR, there is no guarantee that it won't change over the course of the loan. Lenders in most cases reserve the right to change the APR as they deem necessary.

How APR affects your loan's cost?

To clearly illustrate how APR affects the cost of your loan, let's say you're applying for a logbook loan. You want to borrow £400 over the course of 12 months at a flat rate of 100% fixed per annum. The Representative APR is set at 319%. Given the APR and other factors, your total due would amount to £799.84 and your monthly repayment for 12 months would be £66.65.