What is an APR?
APR stands for Annual Percentage Rate and equates to the interest and other charges payable on the loan expressed as an annual rate charge.
All lenders must display their APR before you sign an agreement.
APRs are useful for comparing similar loan products. However they lose this usefulness when comparing different loan products. Below is an example of this:
| Type of loan | Amount | Month | Total repayment | APR | Actual interest |
|---|---|---|---|---|---|
| Payday | £500 | 1 | £650 | 2289% | 30% |
| Instalment | £500 | 30 | £719 | 17.5% | 44% |
| Instalment | £500 | 60 | £938 | 17.5% | 88% |
As you can see the APR for the two instalment loans are the same but the actual interest repaid is very much more on the longer term loans. This is because it is difficult to compare a one month loan with a 30 or 60 month loan in terms of an annual percentage.
The APR on your payday loan is an annualised rate but for the very short term, thus the rate should not be considered as comparable to the APR on for example, a mortgage or other long term loan.
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