What does APR mean? In short, annual percentage rate, but there’s more to it than that.
Personal finance is full of confusing terms and acronyms, and the phrase APR is certainly one of them, leaving many of us wondering ‘what does APR mean’?
Luckily you don’t need a complicated APR calculator to answer the question ‘what is APR’. APR is short for annual percentage rate and you will find it advertised on any borrowing product from credit cards and loans to mortgages.
Annual percentage rate (APR) explained
The percentage in question is the annual percentage you will be charged to borrow money, and all financial products that lend you money must show the APR rate so you can fairly compare products.
As such you should think of the APR as the cost of borrowing. It will cost you more to borrow on money on a credit card with a high APR than a card with a low APR.
APR is calculated the same way by all lenders and takes any additional fees and how often interest is charged into account, making it a great way to compare different financial products that would be difficult to compare side-by-side otherwise.
There are two different types of APR though; a personal APR and a representative APR.
Typical or representative APR
While personal APR is the rate that you will pay if you take out that financial product and borrow money on it, things get more complicated with a typical or representative APR.
A representative APR is what you are most likely to see on commercials for credit cards and loans, but beware, what you see is not always what you get.
Representative or typical APR refers to the rate that at least 51% of people who are accepted for that product will pay.
That means that up to 49% of people who take out that product may pay a higher APR than that advertised, so always look out for the word ‘representative’.
And there’s nothing in the law to say how much higher the rate you are offered is in comparison to the representative APR.
What can you do?
The problem with typical or representative APRs is that you don’t know the rate you will be offered until you apply.
However, every time you apply a mark is left on your credit file, meaning you can’t apply for too many credit products at the same time.
The only thing you can do is read the small print and be aware of this situation. For example the advertised APR may be dependent on you fulfilling certain conditions, or applying over the internet of phone.
It can also be useful to check your credit report to get a clear picture of your financial history. If you have a good credit file you are more likely to be offered the headline rate.
How does APR work?
Let’s look at a few examples of APR rates to see how it helps you compare.
If for instance you borrow £1,000 on a credit card with a 6.9% APR, and if you pay back that £1,000 over the course of a year in equal monthly instalments you will pay £37.77 in interest in total.
Borrow and pay back the same amount as a loan for instance with a 7.9% APR and you’ll pay closer to £43.31 over the course of the year.
However, the longer the period over which you spread your repayments, the lower the monthly cost but the higher the overall interest paid.
So that 6.9% APR over the course of two years would cost you £73.45, and at 7.9% you would be paying £84.36.
Where can I find low APR products?
Though APR may sound like the only thing you need to consider when borrowing money or choosing a credit card it’s not.
Choosing a sensible form of borrowing depends entirely on what you need it for, your financial history, and how quickly you are able to pay it back.
For instance, if you have a poor credit history you may struggle to find a credit card or loan with a low APR. In fact, you may struggle to find any form of credit at all.
However, if you have a poor credit history, low APR is not what you need. Rather, you’d be better off choosing a so-called credit builder card which has a high APR.
It works by borrowing a little on it and repaying everything in time to avoid interest payments, and building your credit file.
Similarly if you have a high amount of debt on one card and want to transfer that debt you’d be better off with a good balance transfer card than a low-APR card.
Or if you plan on using your card predominantly for shopping you might be better off with a rewards or cashback credit card.
And if you know you will be able to pay back your balance in full every month, then the APR doesn’t matter as you won’t pay any interest.
Rather low APR products are best for steady and planned borrowing. If there is a fixed amount you need and will pay it back steadily in regular instalments, then choosing your product according to APR is vital.
APR vs AER
Although they may sound like roughly the same thing, APR and AER have completely different meanings.
AER, or annual equivalent rate, is the APR equivalent for savings accounts, and tells you how much your money will earn in interest over the course of a year.
The AER will allow you to compare different savings products.