When you are applying for credit or loans, you may hear or see the terms “Interest” and “APR”. The two terms have similar meanings and often get confused. It is important that you understand the difference, so you can make the right decisions when it comes to applying for credit.
What is interest?
Interest is the amount you pay back in addition to the loan or credit amount. For example, if you borrow £500 and are required to pay back £600, the interest is £100.
Interest rates are usually expressed as a percentage. In the above example, the interest is 20%. You are required to pay back 100% of the money borrowed plus 20% of the total loan amount.
On some loans, you may have to pay compound interest. This means you pay interest on the total amount borrowed plus any unpaid interest. Many credit cards work on a compound interest basis, which is why it is usually recommended that you pay more than the minimum repayment each month.
What is APR?
APR stands for Annual Percentage Rate. As well as the interest you pay on your credit, APR includes any fees and other charges such as admin fees or broker fees. It is a total charge for the loan for each year of the credit agreement.
APR was designed to help customers compare loans, so they could decide which was the right option for them. Lenders are required by law to show the Representative APR rate on any consumer credit agreements.
A loan from ‘Lender A’ may have lower interest rates than a loan from ‘Lender B’, but the fees with ‘Lender A’ may be higher. If you only compare interest rates, Lender A could look like the better option. When you compare APR, the interest and fees are included, so you may find that ‘Lender B’ is the better option overall.
If you are comparing loans, then APR is an important factor to look at as part of your decision. Remember though that APR looks at the loan over a year and not all short term loans will be taken out over this term so other factors should also be considered.
APR rates are calculated over a yearly basis which means that the APR on a short-term loan, paid back over a few weeks or months, may seem much higher than that of a loan paid back over years.
APR rates will almost always be higher than interest rates because they include the interest rate plus any applicable fees.
Morses Club is a leading UK provider of small cash loans. Occasionally we may be able to accept customers who are seeking bad credit loans or have been rejected by other providers. This is not guaranteed; every situation is unique. We will run credit checks and meet with you face to face before we decide whether you are eligible for a loan. As responsible lenders, we only lend to customers who can afford to pay back what they borrow. To find out more about our cash loans visit our how it works page.