APR - Annual Percentage Rate

When looking for a personal loan it is worth comparing the interest rates and a way to do this is by checking the APR (annual percentage rate). The APR provides an indication on how much interest you will be charged on a loan over a year, which lenders in the UK must make clear in their products.

Most lenders will quote a ‘typical’ APR in their advertising, however this APR will not be offered to all the borrowers but to around 67% of them. The lender will assess your income, credit history, job security, whether you’re on the electoral roll and how much you can afford to pay. This criteria is what the lender will be using in order to assess whether to offer the ‘typical’ APR rate to you, if you do not fit the lender’s profile the APR they will offer will be higher than the advertised rate.

TAR vs. APR

Because lenders legally have to display their APR, they try to find clever ways to make the APR on display as low as possible. When it comes down to it, you really should be concerned with TAR - Total Amount Repayable. When comparing loans and deciding if you can afford to borrow money, the wisest thing to do is to look at what your monthly payment will be and to figure out the total amount you will have repaid at the end of your loan. TAR is more important than APR, hands down.

Fixed vs. Variable

If you decide to take a larger loan, you will have to decide between a fixed rate and a variable rate. A fixed interest rate does not vary for the fixed rate period, so payments remain constant for this period. A variable rate is an interest rate that is subject to variation in line with economic changes.

An APR is a good measure to compare personal loans, however this shouldn’t be taken in isolation as other factors such as early repayment penalties or the length of the personal loan will influence the overall cost, or Total Amount Repayable. A potential lender will be able to show you what the monthly costs will be so you can be sure it fits into your budget.