APR....this three letter acronym stands for 'Annual Percentage Rate'.
So what does it mean?
Basically, the APR is the clear representation of the cost of credit on an annual basis. Having a prominent display of the APR is a legal requirement for companies offering any type of credit as defined in the consumer credit act. This offers consumers the opportunity to compare the actual annual cost of credit with different providers. This makes it easier to cut through any of the marketing gloss and find the deal that truly represents the best value for money. Basically, it's making the cost of credit clear and removes any misleading or false claims which can only be a good thing.
The APR sounds straight forward but it comes from a fairly complex mathematical equation. For a scientific look at APR and how it's calculated take a look at the following article on Wikipedia - http://en.wikipedia.org/wiki/Annual_percentage_rate
What does the APR figure take account of? The APR figure factors in the following:
1) Amount of credit
2)
Interest rate being charged
3) The term of repayment
4) Administration fees and charges
5)
Any broker charges
As a result, 9 times out of 10, you will find that the APR figure is higher than the actual interest rate since it's driven up by the inclusion of all other costs to allow fair comparison of products.
Here is a quick calculation
of a home loan, you can see how the APR is higher than the pay rate
(find out more on the budget calculator):
Loan requested £72,000
Repayment term of 17 years
Interest rate payable 5.99%
£999 arrangement fee
6.6% APR
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