What is APR?
APR stands for annual percentage rate, this is the annual rate of interest you pay on borrowed money and includes any compulsory fees or charges added to a loan or credit product.
This makes it easy to compare financial products as it shows the total cost of borrowing over a year.This also means you can compare different products e.g credit card vs a loan. It's not always a total measure as it is based on scenarios. E.g the APR for credit cards is based on £1000
APR is the amount that you charge to borrow money and all financial product must show this so you can fairly compare product such as credit cards, mortgages or personal loans.
Without APR, trying to compare different financial products side by side will be difficult.
APR is typically added to a debt on a monthly basis, to find a monthly interest rate simply divide the APR by 12. So if the APR is 12% the monthly rate is 1%.
Representative vs Real APR
When a company quotes a representative APR you are not guaranteed to get that rate. That is the rate that has been offered to 51% of people and you might just be amongst the 49%.
While APR is the rate that you will pay on any money borrowed(credit cards etc), the method by which APR is calculated is incredibly complicated and how this number is advertised is slightly more complicated. APR is advertised as either a typical or representative APR.
A representative APR is what you are most likely to see on commercials for credit cards and loans, but beware, what you see is not always what you get.
Representative or typical APR refers to the rate that at least 51% of people who are accepted for that product will pay. Meaning up to 49% of people who take out that product may pay a higher APR than that advertised.
So how do you get the best APR and what is a good APR?
Getting the best APR is really difficult as most lenders do not publicly disclose their lending criterias which they use to determine which APR you are offered. Your best bet at getting a good APR is by following well known affordability guidelines before applying for a financial product. Or even better you can see what products you are eligible via your Huuti dashboard and what you can do to increase your eligibility and offered APR.
It’s hard to say what a good APR is, a good APR is all dependant on your current affordability. E.g if you have a credit score of 240 and I have one of 120 our ideaof a good APR might be substantially different. Your best bet is to see all the products you are eligible for in a given market (e.g credit cards) and see who offers you the best rate….and then figure out why you can't get a better rate by looking at your credit report.
APR isn't the only factor you should consider, you might want to consider some of the deals and offers that come with particular products e.g credit cards.
Not everything is included in the APR though. The APR only includes charges that are compulsory and in line with how you will use the lenders product. It does not include any charges or fees which you may incur voluntarily.
For credit cards, the representative APR assumes you only use the card for purchases and doesn't take into account different rates and fees which might apply if you use the card in different ways, such as for balance transfers or cash withdrawals.
It also doesn't include any fees or charges for things like late payments, going over your credit limit or returned payments. Only compulsory charges are included in the representative APR - so voluntary charges like payment protection insurance aren't included either.
If you skip or fail to make payments on your credit products such as your credit card. The amount of APR might increase in a process called compounding. This is where interest is charged on capital owed plus any interest and charges from previous months. This can put you in debt.
APR vs AER
Although they may sound like roughly the same thing, APR and AER have completely different meanings.
AER, or annual equivalent rate, is the amount of interest you will earn on your savings and deposits over the course of a year.
The representative AER will allow you to compare different savings products.