APRs Explained

If you ask a number of different lenders what their repayments might be on a loan of say £10,000 at 6%, you may get a variety of different answers.

This not because lenders are poor at doing their sums, but because there are many ways in which the question can be interpreted mathematically, depending on the assumptions made.

As a result it was hard for consumers to compare rates from different lenders. To solve this problem, the government introduced the APR (annual percentage rate) which must be quoted in adverts for many financial products.

The APR is calculated by a complex formula which expresses the total costs of a loan (i.e. not just interest but also fees and charges) over its anticipated lifetime, as a percentage – the APR.

APR’s can be of great value to consumers – consider the following example. X Bank offers a discounted loan with an initial interest rate of 5.5% for a 3 year period, following which the borrower reverts to the “standard” rate of 7.75% for the remainder of the loan. Y Bank offers a “standard” rate of 7%.

Which is the cheaper? Depending on the level of fees charged, X Bank’s initial rate of 5.5% may translate into an APR of 7.5%, whereas the APR of Y Bank might typically be 7.4%.

This example has been deliberately simplified, but hopefully shows the way in which APR’s enable more accurate comparisons to be made.

APR’s are always expressed to one decimal place, so that an APR of 7.351% and an APR of 7.399% would both be quoted as 7.4%.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 The Financial Services Authority (FSA) does not regulate some forms of mortgage. 

The information set out on this page is intended to provide a general appreciation of the topic and it is not advice. Guidance should be sought from a specialist who is qualified to advise in your specific circumstances.

For more information on any aspect of mortgages please contact Surrey Financial Advice on 01483 211800 or email us at admin@surreyifa.co.uk  We will be happy to assist you.