What Does Annual Percentage Rate (APR) Mean?

Discover what APR means and how it relates to the rates you are offered for car finance.

Applying for a loan or credit card can be confusing and it can be easy to get bogged down by the numbers if you don’t understand what they mean. If you’re unsure about what APR and interest rates are, you could easily be charged a much higher rate without noticing. 

When searching and applying for a loan, it’s important to know what APR means and how loans work before you apply. 

What is APR?

APR (Annual Percentage Rate) is the official interest rate used when borrowing money. APR shows the total cost from borrowing per annual year. This percentage rate includes any standard fees and interest.

If you were to borrow £10,000 over 3 years to purchase a car, an APR of 5.5% would include the annual cost with interest and standard fees included.

You would pay 3 years’ worth of monthly instalments of around £301, totalling £10,848.60. This includes the original £10,000 that was borrowed plus interest and fees.

Representative example: borrowing £7,500 over 5 years with a representative APR of 20.25%, an annual interest rate of 20.25% (Fixed) and a deposit of £0.00, the amount payable would be £192.84 per month, with a total cost of credit of £4070.40 and a total amount payable of £11,570.40.

Representative APR

When a loan is advertised with representative APR, that rate must be offered to at least 51% of successful applicants for the loan/credit. However, this means that the other 49% may not be eligible for the rate advertised and are likely to pay more.

Personal APR

Personal APR is the rate you’re actually given and will be based on your personal circumstances as well as the amount you want to borrow.

Some of these factors include:

  • How much you want to borrow
  • Your financial situation
  • Your credit history

Whats the Difference Between APR and Interest Rate?

An interest rate only involves the amount charged on the sum you borrow. It is written as a percentage and is most often quoted annually.

APR, on the other hand, also includes the rate of interest and any additional fees which makes it more of a true representation of the overall cost.

What is a Good APR?

The lower the APR, the less you will pay on interest and additional fees.

Many credit cards will offer 0% APR on purchases and balance transfers for a fixed period of time. However, it is always important to double-check what the APR will become after this period of time so you don’t get caught out after the 0% period ends.

If you are unable to get a 0% APR deal, a percentage rate of around 14% or lower is usually considered a low APR for credit cards.

Should I Choose a Loan Provider Based on APR Alone?

APR is just one of many factors that should be considered when it comes to finance and credit.

It is always good to check if any additional fees may occur during the time you have the loan or the credit which can vary between different credit card issuers.

With any financial decisions, it is always good to take time and research your choices thoroughly.

How Is APR Calculated?

APR is often calculated by looking at various factors, such as:

  • The amount being loaned
  • The schedule for the loan repayments
  • Any extra or late payment charges
  • Your credit score

Or alternatively, a lender may just offer a fixed APR available to everyone.

Is APR Fixed When You Take Out a Loan?

With a lot of personal loans, the APR is fixed and will stay the same for the entirety of the loan term, so you can be confident about how much your repayments will be each month.

Some loans may have variable APRs, which means that the APR can change over time, so your monthly repayments can change over time.

Before you apply to borrow money, it is important to check which type of APR you’re being offered so you don’t get a nasty surprise later down the line.

Can I Get a Low APR Rate With Bad Credit?

If you have a poor credit score, it’s unlikely you’ll be accepted for a loan with a low APR because you’re seen as high risk in the eyes of lenders.

For poor credit scores, it may be worth looking at bad credit car finance or guarantor car finance for options that could be available to you. These options are specifically designed for people who have a poorer credit history.

However, these options have higher APRs than standard loans, making them a more expensive way to loan money.

APR and Car Loans

Unless you’re paying upfront for your new car, a car loan is the payment option most people will go for.

All of the above information is incredibly relevant for acquiring a car loan and works almost exactly the same.

There are three different types of car loan that are available:

  • Hire Purchase
  • Unsecured Personal Loan
  • Personal Contract Purchase
  • Conditional Sale

How Do Car Loans Work?

Car loans allow you to purchase your dream car and choose a flexible payment option for monthly repayments.

Once you have asked for a quote and found the right deal that works for you, there will be final checks carried out. When you are fully approved, the funds are transferred to the dealer within 24 to 48 hours.

Drive Away Happy With Quick Car Finance

Our car finance calculator is a key starting point to determine your budget when looking for your dream car.

This allows us to provide pricing tiers based on credit status/history and affordability - so that you can get the lowest rate possible and will not pay more due to market rates or commission from dealers.

The car finance calculator allows you to see what your monthly repayments may look like on the amount you’d like to borrow. Our car finance calculator factors in APR so you have the whole picture.

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