5.1 What is APR?

APR = Annual Percentage Rate

The Annual Percentage Rate (APR) is the total cost of how much you will be charged by the lender, per year, for borrowing their money. The amount you will pay will be worked out as a percentage of how much you have borrowed.

The APR is there as a comparison tool for consumers to make it easier to compare lenders and credit options, including credit cards and other loans. It will only work when you compare credit cards and loans if you consider them on a like-for-like basis, for example loans that run for the same length of time.

According to the Financial Services Authority (FSA) many important factors are included in the APR such as:

• The interest rate you have to pay
• How the loan is repaid; the term of the loan agreement (length); frequency and timing of instalment payments; and the amount of each payment;
• Fees that come as part of the loan; and
• Premiums for payment protection insurance (PPI) that the lender opts to make compulsory

Before you sign a credit agreement the lender will have to tell you what their APR is. This will vary between lenders. Generally speaking, a lower APR means a cheaper loan.

What is Typical APR?

In credit card and loan advertising you will see quotes for ‘typical APRs’. The typical APR is what a lender will offer to the majority of its customers, but not to all of them.

Lenders have to offer the typical APR to two-thirds of its borrowers (67%).

In the small print of the advertisement it will say that the typical APR is ‘subject to status’. What this means is that the lender will look at elements of your application and credit history and decide if you qualify for the typical APR.

If you fit the lender’s ideal customer profile, and don’t present a high level of risk to the lender, you will be offered the typical APR. If you don’t, the lender will offer you a higher APR that reflects your current status.

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