APR stands for Annual Percentage Rate and relates to the total cost of the loan. The purpose of an APR is to help people compare loans and credit cards more easily.
How is APR calculated?
APR is calculated based on interest rates and any fees attached to the loan. Because APR includes fees as well, it helps you compare loans more accurately than if you compare on interest rates alone.
APR is calculated as an annual rate. This means that even if the loan is only a short-term loan, the APR shows what the rate would be if it were taken over a year. This makes it easier to compare credit which is being offered over different terms.
Should you compare interest rates or APR?
If you are comparing loans of the same amount, taken over the same period, then you should compare the APR as this will give a truer reflection of which loans offer a better rate. APR rates will almost always be higher than interest rates because they include the interest rate plus any applicable fees.
Lenders are required by law to show the APR on any consumer credit agreements.
Should you always choose the lowest APR?
The lower the APR, the less you are likely to have to pay back, but that doesn’t always mean the lowest rate is best for you.
Because APR rates are calculated over a yearly basis, APR on a short-term loan, paid back over a few weeks or months, will often appear much higher than on a loan paid back over years. If you don’t want to be tied into a long-term loan, you may prefer to pay the higher rate for a shorter-term agreement.
With credit cards, you don’t usually pay interest if you pay the balance in full each month. If you intend on paying your full balance each month, you might be better choosing a card based on the cash back or rewards rather than the APR. However, if you can only pay the minimum balance, then the lower APR is probably better.
What does 'representative APR' mean?
Some people are less likely to repay loans on time than others, so they pose a greater risk for lenders. High-risk borrowers will often be offered a higher interest rate, and lower-risk borrowers will receive lower interest rates.
A lender can’t advertise their lowest rates if only a handful of people will actually get offered these rates. Representative APR means that at least 51% of borrowers whose applications are successful will receive that rate of APR.
Is APR important?
When you take out any loans or apply for credit, it is important that you understand the fees and interest you are being offered. You won’t always be offered the APR that is advertised; this will depend on how much risk you pose to the lender.
A responsible lender should make it clear what you are borrowing and what the terms and rates are. If you don’t understand how much you have to repay or the timescales in which payments are due, then find out from the lender before you enter any credit agreements.
Morses Club Home Collection Loans
At Morses Club, we provide home collection loans. Before your application is accepted, we will visit you at home to ensure that you understand the terms of the loan and the repayment amounts. As responsible lenders, we only lend to customers who can afford to repay what they borrow. To find out more about our home collection loans, visit our how it works page.