APR - Explained

APR is a three letter acronym that stands for annual percentage rate. The world of finance is packed with so many terms and phrases that it can sometimes be a bit overwhelming. This guide will talk you through exactly what is meant by the term APR and it will tell you everything that you need to know about it.

APR - How is it calculated?

The percentage part of APR is the amount of interest that you pay on the sum that you have borrowed on your credit card. It is worked out over the course of the year as opposed to each month. All forms of loan, credit card or mortgages must have their APR displayed to you when they advertise their products. This is because doing this allows you to compare the various different options that you have in a quick and easy way.

APR essentially represents the amount that you will pay in order to take out a loan. All providers work out their APR in the same way and they take any extra costs into consideration. APR also takes interest into account and how often it is charged. This means that APR is the best way to compare different financial products because it provides a uniform measure of their costs.

Representative APR

Representative APR is the figure that you will normally see quoted for financial products when they are being advertised. However it is important to understand exactly what is meant by these claims of interest.

The phrase "representative APR" refers to the interest rate that a minimum of 51% of people who take out the product pay. This means that almost half of the people who take out the same product may pay much more than the APR advertised. There are no legal requirements that restrict how much more a company may charge you than the amount that they have quoted as "representative". For this reason you should be careful when signing up to a product as the amount of interest you pay may be significantly higher than the representative APR.

Personal APR is the rate that you yourself will pay on each product. This is the most relevant figure that you will want to consider when you take out a loan or a credit card.

What does this mean for you?

One of the main issues with representative APR is the fact that you will not know how much interest you will actually pay until you have already applied for the card. This would not be a problem except for the fact that every single time you apply for a credit product, you will receive a mark on your credit file. This means that you should not apply for too many loan products at once.

What you should do is check the terms and conditions of the loan before you apply for it. Many credit products of this kind have certain requirements that you need to meet in order to receive the APR that is advertised. You should also find out what your credit rating is so that you have a decent idea of how much of a chance you have of a successful application.

What is AER?

AER and APR are very different things. APR, as we have said, is the amount of interest that a lender will charge on its loans. AER actually refers to savings accounts. More specifically it refers to the amount of interest you can expect to receive if you were to open a savings account.

AER stands for annual equivalent rate. Unlike with APR you want to find an account with the highest possible AER, ideally, as this will give you the highest return on the amount you put away.

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