APR is the Annual Percentage Rate which would be charged on a loan or any type of credit product.
For any individual who is planning to apply for a loan, it is important to understand what APR is and what are the few important questions that he/she should ask a lender about the APR.
An APR would include the interest rate that you will have to pay on the loan, fees that would be payable on the loan etc.
All lenders are required to inform the borrowers about the APR. In general, the lower the APR of the loan, the better it would be for you so as a borrower, it should be your goal to find the loan with the lowest APR possible.
However, there are also a few other things that you will have to look at as well since the APR might not always include all the other charges that would be associated with the loan like missed and late payment fees, the set up fees, early repayment fees etc.
For this reason, you should look at the total amount that would be payable on the loan in order to get a fair idea about the amount that you would need to pay in total.
Understanding APR and its limitations
An APR would allow you to calculate the cost for the loan in a percentage term. If your loan carries an interest rate of 10%, then you would have to pay GBP 10 for every GBP 100 that you borrow.
With everything else being equal, you should be looking for a loan that offers you the lowest possible APR. However, in real life, things are not always that easy and the other factors do not remain constant across different loan deals.
An APR can include several more things other than just the interest rate for the loan. For a mortgage, the APR can also include the discount points, processing fees as well as the private insurance for the mortgage.
There are also several other charges and fees that might be included or excluded from the APR quote that a particular lender has provided you. For this reason, it would be important for you to study a lender quote for a loan quite carefully. You should ask each lender specifically about all the charges that have not been included in the APR.
An APR on its own would not be a reliable factor for evaluating a loan. You would also need to consider all of the other expenses, charges and fees in order to judge whether or not the deal is cost effective or not.
Again, you will have to look at the bigger picture. You would also need to think about how long you would be using the loan. Even simple up front charges on your loan can bring up the cost of your loan substantially even if it is just a one time cost.
An APR calculation would typically assume that all of these costs would be spread over a longer period of time. For this reason, you would have to take all of the other charges into consideration along with the APR.