A lot of people start to switch off when they hear financial jargon, and ‘APR' is one of those terms. It stands for Annual Percentage Rate, and by the time you've finished reading this blog post you'll understand it a little bit better.
The APR of a loan can be seen as the cost of borrowing money, and you can use it to compare the cost of loans and other forms of credit across different banks or financial companies. Lenders are actually obligated to tell you what the APR is if you are applying for a loan. A lower APR means you will be paying less to borrow the same amount of money than a higher APR. It includes:
- Interest A percentage of the borrowed amount charged by the lender every month on top of the outstanding debt, essentially this is how banks make money from lending.
- Arrangement fees and payment insurance
It does not include late fees or penalty charges, although you may be liable for these if you fail to make an agreed re-payment in full.
There are several different factors that can affect your loan's APR, and many of them are about you:
- How much you are borrowing
- How long you are borrowing it for
- Your credit history
- Your current financial situation
- Your employment status
- How often you make re-payments
- How much you repay at a time
A lender will use this information to work out how likely it is that you will be able to afford the repayments, and the lower their risk, the lower APR you will receive. If you have a poor credit history or are unemployed, you may find you are offered a very high APR, or are not able to borrow at all.
In order to keep your APR low you want to borrow as little as you can and pay it back as fast as you can afford to. It's pretty easy to see how much you can afford to repay every month if you are aware of your regular monthly financial transactions, and money management software Money Dashboard can help you do this.