How APR Works

We have briefly covered the issue of interest rates in the past, but felt that such an important issue deserved another look now that time has passed. We look at how APR works, and how interest rates affect every part of your life.

How does APR work?

APR stands for annual percentage rate. An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. Thus it is essentially a finance rate expressed as an annual figure. Even if you repay a loan for a period less than a year, you will usually see an annual interest rate quoted. 

An Example

Perhaps it is easiest if we use an example to display APR in action. This gives you a clearer idea of what is involved, and the sort of interest rates that many may pay. 

You for a loan of £10,000. You see a lender offer a product with a fixed APR of 10%. In this instance, a £10,000 loan with 10% fixed APR requires paying back an extra £1,000 over the first year. If the loan was for 6 months, then £500 interest would need to be paid on top of the borrowed amount.

How APR Works – Is lower APR always better?

Generally, a lower APR figure means you’ll pay less interest on what you borrow, reducing the costs of credit. So in general, yes it is better. However, there are caveats to this point of view. The APR is an annual rate, so for one year. It might well be for the duration of your loan, however long it is, thus a constant rate. But not all interest rates are, so always ensure you are aware of what needs to be repaid when you borrow money. Rates may change, especially if there is an introductory offer rate as part of the deal. There may also be other fees payable, it is not always just about the interest rate. Even if you secure a low APR deal, this doesn’t give you a licence to get £1000s of credit and spend to your heart’s content. It’s still vital to budget your repayments effectively.

APR Can Vary

Variable APR means that lenders could and probably will change the underlying interest rate at any time during the term of the credit agreement. This could be a positive or negative, depending on market conditions. Fixed APR is as it sounds. The underlying interest rate is guaranteed to stay the same until the credit agreement ends.

How APR Works – Can APR be negotiated?

This is unlikely. The APR offered by a lender tends to be set in stone. Occasionally you can negotiate in person, but this is the exception to the rule. A lender is not desperate for your business on the whole, so has little reason to make concessions. The exception is credit is advertised with a Representative APR, because you might not be charged the quoted rate. Representative APR means 51% of customers must receive this rate, but other customers (usually those with less than average Credit Ratings) are likely to be charged a much higher rate.