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APR stands for annual percentage rate of charge. It includes
All lenders have to tell you what their APR is before you sign an agreement. Generally, the lower the APR, the better the deal – it’s supposed to help you shop around.
But it isn't as simple as that
Lenders only have to include compulsory charges. Not all lenders will give you the full picture. The APR quoted doesn’t always include such things as charges for missed or late payments and things like payment protection insurance.
For instance, a weekly payment rent-to-buy store (it’s borrowing, isn’t it) might quote 29.9%. But once they’ve added in ‘optional’ service cover (try stopping them!) and the real cost comes to the equivalent of 350% APR.
Calculating APR isn’t simple either. There are all sorts of ways that could be in general use. You can’t just divide the amount you pay back by the amount you borrow.
For instance, a Payday Loan of £300 with £373 to pay back in one month isn’t
57.6% APR, it’s actually 1,264.7% APR (Yes – one thousand, two hundred and sixty-four!)
It involves a formula containing the period of loan & the effects of compound interest. Written down, the formula can be the width of the page. You couldn’t really do it without computer software.
Luckily there are websites you can go on & do it for free. One such is PrudentMinds
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