Finance is full to the brim with acronyms and strange terms, all of which can leave customers feeling confused and uncertain. For people who are looking to take out some form of credit, APRs and APRCs are two of the most important terms you’ll want to know about.
What do they mean and why are they different? We explain all below.
Annual Percentage Rate (or APR, as it is more commonly abbreviated to) is used to allow you to easily compare the cost of credit for things like credit cards or unsecured loans. From April 2020 APRs will also be used for overdraft pricing so they can more easily be compared to other forms of credit.
Typically, the APR considers both the interest rate of the card or loan, as well as any additional charges that might be applicable. The APR only includes compulsory charges, so additional extras that the lender may encourage you to take out as well could mean your total cost of credit is higher. It also excludes fees for things like missing payments or going over a credit limit.
APR is always shown as a percentage, with higher figures meaning they are more expensive to borrow against and lower percentages meaning they are cheaper. For example, if you’re trying to choose between two credit cards – one with an APR of 20% and another with an APR of 17%, then the second one will cost you less to repay if you start to incur interest.
A personal APR is the specific rate offered to you by a lender based on your circumstances and credit score. The representative APR is the rate that 51% of all those accepted for a loan or credit card are offered. The other 49% may be charged more or less but practice it is nearly always more. A representative APR is not a guarantee that you will get the loan or credit card at that rate or even be offered credit at all – it’s an illustration of what the majority receive.
Those who have a better credit score can expect to get a personal APR which is lower than someone with a worse credit rating.
Needless to say, pay careful attention to which one any credit provider is offering.
APRCs are only used for mortgages and secured loans (those secured against your home or property). As with APRs, this is intended to give you a guide to how expensive the interest repayments on these two types of product will be.
In the past, APR was used for mortgages and secured loans, however, from March 2016, APRC was introduced.
There are essentially three rates of interest that you need to be aware of on a mortgage: the initial rate, the follow-on rate and the APRC.
The initial rate is the interest rate payable for a limited period at the start of the loan. For example, imagine you’ve applied for three-year fixed rate mortgage with an initial rate of 2.00% fixed for the first three years. The follow-on rate for this mortgage is normally called a Standard Variable Rate or Existing Borrower Rate and could be, say, 4.50%, that you’ll start paying when the initial fixed term ends after three years.
The APR is a measurement of both these rates, plus any other charges that the lender may include, represented as a percentage. The APRC is the overall cost of the mortgage (or secured loan) across the whole term. This rate is not set, but will change if the follow-on interest rate changes – as it most often will with a variable rate, if your tracker rate changes due to the base rate going up or down and, finally, if you remortgage.
Always be very clear about the APR or APRC you are being offered. There can be a world of difference between the big, headline rate of interest being offered and what you may end up paying
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.