What is APR and How Does it Work?

13/02/2020

The APR (or Annual Percentage Rate) is the rate used to help borrowers understand the true cost of a loan. When borrowing money in the form of a mortgage or otherwise, providers must tell you the APR. This must be done before you agree to the loan. APR is used to compare different types of loans; it takes into account all compulsory charges to calculate a percentage.

Remember that the APR only takes into account the compulsory charges of a loan. Thus, it is best to understand all charges that could be associated with the loan, such as late payment charges or going over the credit limit, before borrowing. If concerned about early repayment charges, you should speak to your lender. You may wish to consult the small print and terms of your mortgage or loan too. This will help you understand the implications of early repayment charges.

How is APR Applied?

APR is used to express the cost of a variety of different loans, including credit cards and unsecured loans. There are two main ways in which APR is expressed, these being:

Representative APR

Personal APR

Representative APR is a type of advertised rate that, at the very least, 51% of approved borrowers receive. Personal APR is the ‘true’ rate a borrower is given. Whilst this could be exactly the same as the representative APR this is not the case for nearly half of those applying, and your eligibility will have to be checked for this to apply.

The rate you are offered by a lender will depend upon different aspects of your financial situation, your mortgage affordability and how good you have been with borrowing in the past.

What Is an APRC?

The true cost of secured loans (such as mortgages and second mortgages) is shown not as an APR, but through an APRC.

APRC (Annual Percentage Rate Charged) is essentially the same as an APR. APRC is specifically used to show the true cost of borrowing particular secured loans. The APRC for mortgages helps borrowers better understand overall costs for the loan. Like APR, the APRC will collect all compulsory charges for the loan and calculate the cost of borrowing as if the borrower were to keep the mortgage unchanged through the full term.

Mortgages can often offer low rates for the initial few years the borrower has the mortgage for. APRC helps to factor this into its calculations, providing the borrower with a more accurate representation of the true cost of the mortgage compared to what an APR would show.

How to Get a Low APRC

A mortgage’s APRC varies depending on multiple factors, whilst you could get a representative APRC of 4%, the personal APRC that is actually offered may be 7%. This could be due to your personal circumstances affecting the loan cost.

APRC can change depending on how much you seek to borrow, how long you are borrowing for and other details relating to your personal financial situation (such as your credit score.)

Typically, the more money you borrow, the lower the rate. However, it is important that you only borrow a sum you can manage to repay to avoid any additional fees and financial strain. The standard length of a mortgage is around 20/25 years. However, you can those that are shorter or longer than this.

Many people extend their mortgage term to reduce their monthly repayments. However, this will increase the overall cost for the loan by borrowing money for a longer time period. 

Your Credit Record and APRC

Having a good credit record can help lower your APRC, as having a healthy credit score makes you look more trustworthy to lenders. In the UK, your credit score is recorded by credit referencing agencies (CRAs):

Experian

Equifax

TransUnion (formerly Callcredit)

These three agencies take various details of your financial and credit history into account and generate a score, also known as your credit score.

How to Compare Mortgages With the APRC?

As the APRC helps to provide borrowers with a more accurate depiction of the cost of their mortgage over its lifetime, it makes comparing different mortgage deals more accurate.

Some mortgages will have lower interest rates than others. However, factoring in all charges, those with lower interest rates may end up being more expensive than other mortgages with slightly higher interest rates. APRC helps those comparing mortgages to see this, helping to find the best deals, and have a more accurate understanding of the true cost to a home loan.

Whilst APRC can help borrowers better understand the true cost of a mortgage, this rate is calculated with the assumption that the same mortgage will be kept for the entirety of the loan period.

Many borrowers often remortgage during the home loan repayment period, meaning the APRC may not be an accurate representation to the true cost of a mortgage. However, whilst not always entirely accurate, this rate can help borrowers to better understand the cost of a mortgage, and how the differing rates and fees have an impact on this cost.

As a mortgage is secured against your home, your home could be repossessed if you do not keep up the mortgage repayments. Think carefully before securing other debts against your home.

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