Credit cards Updated:
APR is a term you will see on several different lending products. Until March 2016 it was used with mortgages, credit cards and loans. However, there are now two very similar versions, essentially doing the same job:
APR – Short for Annual Percentage Rate, it's a legal requirement for APR to be shown on personal loans, credit cards and hire purchase agreements so that an easier and fairer comparison can be made.
APRC – This stands for Annual Percentage Rate of Charge and is now used for mortgages, including second charge mortgages (i.e. secured homeowner loans).
To muddy the waters further, there are also two types of APR:
So, an APR or APRC basically shows how much your borrowing will cost over the period of an average year, over the term of your debt.
They take into account the interest charged as well as any additional fees (such as an arrangement fee on a mortgage or an annual fee on a credit card) you'll have to pay. They also consider the frequency with which interest is charged on your borrowing, as this has an impact on how much you'll pay as well.
Using an APR or APRC can be a more effective way of comparing financial products than just using the rate of interest charged. That said, it can also be more accurate to compare the actual interest rates and fees you are being charged to determine what you will pay.
This is pretty straightforward: a personal APR or APRC is what you will pay.
For a mortgage this will be the same as the advertised APRC, as with a mortgage you can either have it or you can't. If you can have the mortgage, the rate doesn't change depending on your credit score – which it may do with a credit card or a loan.
When you are accepted for a credit card or loan you should check the rate you are actually being charged, as this could be considerably different to the "representative APR" quoted on any advertising.
The rate of interest you'll pay on credit products is decided by your credit score and status. However, in order for these products to be comparable prior to application (as you'll never know what rate you'll get until you're accepted), they are required to display a "representative APR/APRC" in advertising.
A Representative APR is an advertised rate that a minimum percentage of customers will pay. This minimum percentage is 51% of the people who are accepted for the loan.
So nearly half of all those applying for a credit card or personal loan could pay more than the representative APR being advertised.
For personal loans, the representative APR may well differ depending on the size of the loan (for instance, 15% APR for loans of £1,000 to £2,999, and 10% APR for loans of £3,000 to £4,999). Therefore, it's important to only compare representative APRs on the amount you need to borrow, rather than on the headline representative APR, which may not be available on the loan you need.
Remember, in order to secure a mortgage, credit card or personal loan you need to have a good credit rating. To find out if yours has a clean bill of health, contact a credit check provider, such as Experian CreditExpert, to investigate your credit report.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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