The APR (or Annual Percentage Rate) quoted for a loan is the most important factor in determining how much a loan is actually going to cost you. In general terms, the lower the APR the better for you!

In essence, the APR is the interest that the lender (e.g. Northern Rock, Virgin, Halifax, etc.) charges for loaning you the cash.

So, the lower the APR, the less interest you will need to repay, and the cheaper the loan. The total amount of interest you pay over the lifetime of the loan is called credit cost.

APR loan calculators

A great way to get to grips with APR is to play with loan calculators. You can see what affect changing the APR has on your monthly repayments.

What is typical APR?

Typical APR, also referred to as illustrative APR, is the rate that the lender advertises, but is not necessarily the rate you will be offered.

Legally, 66% of people must be eligible for the typical APR for lenders to be able to advertise it.

The lender must quote an APR for you before you reach agreement, and this APR will depend on personal circumstances, credit rating, repayment term, and so on. This is why lenders will ask you a lot of questions before offering you a loan.

APR consumer advice

The FSA (Financial Services Authority) - the bunch of people who regulate the loans industry - offer the following advice on APR when considering a loan:
  • Does the interest included in the APR vary (variable rate loans), or is the rate fixed (fixed rate loans)? If the rate is variable, your repayments could go up or go down. If the rate is fixed, your repayments will stay the same.
  • Are there any charges that are not included in the APR? This could include something like optional payment protection insurance. If so, make sure you understand what they are and when you would have to pay them.
  • What are the conditions of the loan or credit and do they suit you? For example, do you have a choice about how and where you make the repayments? If you suddenly have spare money, can you pay the loan off early - without an early redemption penalty?
  • Can you afford the monthly payments? A more expensive loan (with a higher APR) could have lower monthly payments if they are spread out over a longer period of time. That might suit you better if your budget is tight.