The Financial Group
We simplify all those essential financial decisions
THE EDUCATION SECTION Every month we look at a particular financial topic in a little more detail. This month it is APR (Annual Percentage Rate) ____________________________ What is it? In simple terms, the APR (Annual Percentage Rate) is a measure of how much a given loan or mortgage will cost you in interest & charges per calendar year (based on the full term of the loan). The figure for the APR takes into account all of the normal costs associated with the loan, such as- arrangement fees interest charges any annual charges (which may be the case with credit cards) any other such costs - so as to provide a clear, overall figure for the total cost of the loan. This makes it possible to compare one APR with another. The cheaper the APR, the cheaper loan. But comparing APRs with other types of rates is not entirely straightforward. When not to use APR. Comparing an APR on a mortgage is a fairly pointless comparison, as this will compare the rate over the full term of the mortgage, when most people only hold their mortgage throughout the special deal period, before remortgaging or negotiating another new deal. In this instance a much more accurate method of comparison is a 'true cost comparison' over the period of the deal. This takes into account the monthly payments expected within the deal period and any set up costs incurred to purchase the deal, such as arrangement and valuation fees, etc. As a Company, this is our preferred, and we believe a more accurate, route for comparing mortgages for our clients. Comparing rates. Let's look at an example of why an APR rate is usually much cheaper than an apparently similar fixed or flat rate. Suppose   you   are   looking   for   a   6   year   loan   of   £1,000.   One   loan   quotes   you   a   flat   rate   of   5%,   and   the   other   an   APR   of 6%. Car dealers often do this, and quote a 'flat' rate. Which is cheaper? In fact, you can't compare these numbers. They may look very similar at first, but are actually very different. Depending on the exact calculation, an APR of 6% will usually be much cheaper than a flat rate of 5%. This is because: the flat rate is applied to the whole of the loan every year the   APR   is   calculated   on   the   amount   outstanding,   which   is   reducing   each   year.   As   you   are   paying   the   loan   back   on a regular basis, the interest payment you make reduces. Click here to see an example of the figures Calculating APR The   maths   for   calculating   APR   is   not   entirely   straight   forward   (even   though   it   sounds   as   though   it   ought   to   be), especially   when   a   loan   has   been   adjusted   to   provide   fixed   monthly   payments.   As   you   can   see   from   the   illustrative tables, the interest rate appears to change each month, so there's no way you can work out the APR in your head. What you can do with the above example, though, is work out the equivalent flat rate . You pay £210 in interest on a capital of £1,000 - i.e. 21% over 6 years The equivalent yearly interest rate is 21%/6 = 3.5% That is, each year you pay back an additional 3.5% of the amount you borrowed in interest By the end of loan you have paid 21% You   can   see   that   our   APR   of   6%   has   an   annual   equivalent   of   3.5%   flat   rate,   and   therefore   is   indeed   much   cheaper   than a flat rate of 5% quoted for our 'fixed' example on the pop out screen. Finally, as always, do not hesitate to contact us  if you would like further details or information.