When you’re searching for a personal loan, you may come across some confusing jargon. Whilst a lot of people have heard of loan APRs, they may be unfamiliar with what this actually means.
Written by: Andy Townsend
Head of Marketplace Distribution, Consumer
5th September 2019
APR is an acronym that frequently crops up when talking about lending products like a personal loan. It’s an important aspect of a personal loan – and often plays a key part when making a decision of whether or not to take out a loan.
Not sure what an APR is? Don’t worry. We’ve broken down the different elements of a loan APR to help you understand how it works and what it means for you. No jargon. Just a simple walkthrough – starting with the basics…
APR stands for Annual Percentage Rate.
For a personal loan, the APR is the annual cost of taking out a loan expressed as a percentage.
When you borrow money from a lender – you’ll have an agreement in place to repay that exact amount back in fixed monthly payments over an agreed period of time.
However, your lender will also charge you a certain amount for lending the money to you, expressed as APR. This is the cost associated with taking out the loan and will need to be repaid along with the amount of money you borrow. The APR includes the interest rate (the amount you are charged for borrowing the money – a percentage of the total amount) and other additional fees and charges involved in taking out a loan.
There are two types of loan APRs:
Fixed APRs essentially means that your monthly loan repayments remain exactly the same from the start of the loan term to the end.
Variable APRs, however, can change or fluctuate over time. This would mean that your loan repayments could potentially vary from one month to the next.
So before you take out a loan, double check what type of APR you’re being offered so you know exactly what to expect.
With Shawbrook, you can get a quote for your guaranteed personalised APR that remains fixed for the whole term.
So, let’s say you apply for a loan with us.
You want to borrow £5,000 to help fund a new bathroom.
Having carefully looked at your current expenses and how much can you comfortably afford to borrow’ afford to borrow, you decide you’d like to pay this back over 3 years (36 months).
Here’s a breakdown of what your loan could look like.
|Loan Term||3 years (36 months)|
|Annual Interest Rate||16.9% p.a. (fixed)|
|Total to Repay||£6,303.14|
*Note: All loans are subject to status. The APR you are offered could differ depending on the lender you choose to borrow from, their assessment of your financial circumstances and your chosen loan amount. Terms and conditions will also apply.
Again, this is a term that you may have come across before – especially in advertising.
FCA guidelines state that when lenders include certain content in their advertising, they are required to display their Representative APR.
This is the APR that a lender can reasonably expect to offer to at least 51% of successful applicants.
It allows potential borrowers to make a rough comparison between different lenders when shopping around for a loan.
You should bear in mind that this may not necessarily be the rate you are offered when you apply for a personal loan. The lender may offer you a higher rate than the advertised representative APR based on their assessment of your personal circumstances.
So, how is your personal APR calculated?
All lenders calculate an APR in the same way but the APR offered to you may differ between lenders because of other factors such as their internal lending criteria.
There are a number of things that lenders will take into account when working out what rate to offer you.
Lenders will always look into your credit background in order to assess how reliable you are as a borrower.
If you’re a risky borrower i.e. someone who has missed payments before – lenders will take this into consideration when calculating your APR. The higher the risk, the less likely they will be willing to lend you the money or if they do lend you the money, the rate offered is likely to be higher.
Someone with a good credit history and good track record of making repayments is more likely to be offered a more favourable rate.
Anything that influences your ability to make repayments – from your income and living situation to the amount of money you want to borrow will usually have some bearing on what APR you’ll be offered.
Although Representative APRs can act as broad guidelines to what sort of rate you might expect to be offered – they should never be taken as guaranteed.
Essentially, you won’t be able to find out what your exact APR is until you apply for a loan, unless you get a quote from a lender and they’re willing to guarantee this rate when you formally apply for the loan.
If you’re thinking about taking out a loan with Shawbrook, you can apply for a quote first and if you’re eligible for a loan with us, you’ll be given your guaranteed personal APR without leaving a mark on your credit score.
That’s because we use something called a ‘soft search’ to check your credit background.
To find out more information and get a quote for your guaranteed personalised rate, head over to our personal loans page.