Loan Rates - What is an APR?

In 1974, a new Act of Parliament, the Consumer Credit Act came into existence.  This new legislation created a new rate of charge, the APR, to make it easier for consumers to compare different credit products including loan rates.  Strictly speaking the APR is the Annual Percentage rate of the Total charge for Credit and represents the true cost of borrowing.  Because of this the APR takes into account not only the interest that you pay, but also any administration, broker or lender fees, so you can use the APR as a measure of value for money to compare loans.

Where ever you see an advert including any cost of credit, the APR must also be displayed in the advert.  This is normally displayed as a Typical APR.  The “typical” part means that at the very minimum, the lender expects that 66% of people responding to the advert will get this loan rate. Most of the time the loan rate will depend upon your individual circumstances and the rate that you are offered may be more than the advertised ‘typical’ loan rate.  

If the advert states that the APR is typical variable this means that the APR can go up and down during the lifetime of the product.  Sometimes the loan rate may go up and down with the Bank of England base rate and sometimes the loan rate may go up and down with a certain lenders Standard Variable Rate but this isnt always the case so you should always read the small print to understand how and when your loan rate can change. The other important thing to do is to work out how much your payments will be if the rate goes up to ensure that you can comfortably afford the loan repayments if this happens. 

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Dan Gale, Moneyextra.com May 2009

2009-05-22 12:26:37 © Moneyextra.com