Can I judge a Cheap Loan by its APR ?
Sep 13, 2006
What is APR ?
APR stands for 'Annual Percentage Rate' and is used as the starting point to compare the cost of loans, mortgages and other credit agreements.
The APR is not just about the amount of interest you pay, however. It also takes into account other charges that you may incur, such as a fee for arranging the loan and additional 'add on' charges.
All lenders are required to tell you what their APR is before you sign any agreement and it can vary significantly from lender to lender. In broad terms, the lower the APR, the better the deal so if you are thinking about borrowing, the APR rate is one of the strongest indicators by which you can work out the cheapest deal for you.
Typical APR
However, there are other extremely important factors that you must consider also, alongside the APR, before signing up to a particular loan or credit agreement.
For example, you will come across many lenders who will promote their 'typical' APR rate in their advertising. A 'typical' APR is the rate at which the company will lend money to the majority of their customers. However, not all customers will be offered that rate. In fact, figures show that, on average, 67% of customers overall are actually offered the typical rate, leaving one third who wouldn't be eligible. Somewhere in the small print, you will usually come across the phrase - "APR subject to status", which essentially means that, once the lender has looked closely at your own personal financial status and circumstances, you may find that you don't qualify for the typical APR. You may be offered a higher (or in some cases, lower) APR than the 'typical' customer.
The lender will assess your income, how much you can afford to repay, the relative security of your job/income, whether or not you are on the electoral roll, your previous credit history and will offer you an APR it feels is appropriate to you. If you don't 'fit' a lender's ideal customer profile, the APR you are offered will usually be higher than the advertised rate, although there are exceptions.
Questions to ask
The choice of product also has an effect on the APR. Take a loan, for example. Is it secured or unsecured? You will find that secured loans usually come with a much lower APR, reflecting the element of less risk to the lender as this kind of loan is usually secured against your property, thereby the lender knows it can offer lower rates as they can recover the money you've borrowed from the sale of your house, should you get into repayment difficulties.
If you find a deal with a low APR, it's important to ask the following questions:
- Does the interest rate in the APR vary or is it fixed ?
If the rate is variable, your repayments can go up as well as down, depending on the Bank of England's interest rates at any given time. What may seem like an attractive proposition initially might prove costly in the long run if interest rates rise. However, if the rate is fixed, the repayments will stay the same throughout the duration of the loan agreement.
- Are there any charges that are not included in the APR ?
These could include arrangement fees and payment protection insurance, the latter being protection that may not be suitable to your personal circumstances. If there are additional charges, it's important to find out what they're for, whether you need them, how much you would have to pay and when would you have to pay them.
- What are the conditions of the loan or credit agreement and do they suit you ?
For example, do you have a choice about how and when you make the repayments? If you suddenly come into spare money, are you able to pay the loan off early without any penalties or will the lender impose an early resettlement fee?
- Can you afford the monthly repayments ?
A more expensive loan with a higher APR may have lower monthly repayments if they are spread out over a longer period of time. Whilst that may mean you paying more in the long run, it might suit you better if your budget is tight.
- What is the actual APR you are prepared to offer me ?
You might see an advertised typical APR rate but, in fact, you may actually have a better credit rating than the average customer and be eligible for an even lower rate than the advertised one.
Comparing loans and other forms of credit by considering the APR is a useful way and the fastest and most simple method of narrowing down the options open to you but it is not the bottom line. Ask the questions, determine what is the best option for your circumstances and push for a rate that's lower than the typical APR.
It's important not to be put off. There is a lot of competition between lenders and if you push for a better rate, you may find you are offered a lower one than that which was advertised.
With Secured Loan UK .com, no matter whether you're Status or Non Status, being a Homeowner means we can get you a competitive rate that matches your credit history.
All you have to do is complete our Secured Loan Application Form and let us give you a FREE and NO obligation quote.
