APR
APR stands for annual percentage rate of charge. It includes
- The interest rate
- How you repay (length of loan etc)
- Other fees & charges
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