The cost of borrowing money with a personal loan is normally given in terms of the APR – the annual percentage rate.
In many cases this is the same as, or very close to, the annual rate of interest. But there can be differences.
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APRs and interest rates
So how might the APR vary from the annual interest rate?
Well, APRs are designed to show the overall cost of credit: this means that they should take into account not just interest charges, but also other potential expenses such as initial administration fees.
The impact of any one-off costs such as initial fees are spread over the lifetime of the loan – so in such cases, the APR will be slightly higher than the annual interest rate.
Financial regulators force lenders to show APRs on many types of credit, such as personal loans, credit cards and payday loans.
The APR is supposed to give a clearer picture of how much a particular deal is likely to cost in total, and should also make it easier to compare the price of one loan with another.
However, as many personal loans do not have initial fees or any other extra charges, hidden or otherwise, APRs on loans tend to be very similar to their annual rates of interest.
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On financial adverts and marketing materials, lenders often show what is called a “representative APR”, which is sometimes also referred to as the “headline rate”.
This is because lenders charge different rates to different customers, usually based on their credit scores: if you have a poor credit history, for example if you have missed repayments in the past, you’ll most likely face a higher rate of interest and APR.
A representative APR must be the rate which is available to the majority of applicants: this means at least 51% of customers should be eligible for this APR.
Lenders are, however, entitled to charge other applicants significantly higher rates.
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Will you be entitled to the representative APR?
If you have a clean credit record and a history of borrowing without missing repayments, there is every chance you will be accepted for a loan at the representative APR.
Before applying for credit, it is always a good idea to check your credit file to make sure there are no surprises or errors on it.
Some lenders let you make an informal application to see if you are likely to be accepted for a loan, and at what rate. The advantage of this is that the informal application is nor recorded on your credit file.
Formal applications are recorded, and a string of failed applications on your file can give a negative impression to any lenders you deal with in the future.
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