What Is APR

One of the most important factors to look for when assessing companies with whom to take out a personal loan is the APR or annual percentage rate. It is simply the amount of interest on the loan you will have to pay in order to borrow (a ‘service charge’ if you will)

For example Bob borrows ten thousand pounds from a personal loan company, with interest deductions made on a yearly basis with the annual percentage rate at ten percent. Now lets say he has the loan over ten years, making one thousand pounds worth of capital repayment every year. So at the interest rate above, he pays ten percent of ten thousand pounds for the first year – which is one thousand pounds in interest. In the second year, he has to pay ten percent of nine thousand pounds (as he has made a capital reduction from the first year) which is nine hundred pounds interest. Whilst the interest rate remains the same, bob will pay less in actual monies every single year as the balance reduces. This is an example of ‘yearly rest’ in determining the loan. Various companies may use different methods in how and when they charge, so it is always best to speak to them directly in order to obtain an explanation.

So now you know what the APR is., you may now ask why is it in place? Well, as mentioned at the beginning of this article it can also be seen as a form of ‘service charge.’ With many different personal loans companies in the marketplace, how would you know which one could offer you the lowest rate service? This would be quite hard to gauge if the APR was not stated, and it was basically introduced for this purpose (primarily). The Consumer Credit Act of nineteen seventy four brought this in so consumers could weigh up the services, and have fees for personal loans, or any other kind of loans transparent and easily accessible.

What affects the APR? – personal loans Apr is made up of two factors. Firstly you have the Bank of England Base rate of Interest. Then, on top of it, lenders add in their charges or costs for providing the service. If either one changes (increases or decreases) so too could the Apr on your personal loan.