APR Explained

APR refers to the Annual Percentage Rate and is the universal measure for comparing the price all financial products such as loans, credit cards and mortgages.

For individuals looking to compare different loans and credit products, they can simply look at the APR to get an idea of how much it will cost and make an informed decision.

Expressed as a single percentage, the APR is calculated to show what the loan would cost if it were taken out for an entire year. The final figure will include the interest rates, admin fees and all other costs.

For loan brokers and providers that are regulated in the UK, it is a legal requirement to show the APR on their website, marketing material, legal agreements and documentation. This allows there to be complete transparency when taking out a loan so borrowers know how much they will be repaying.

What is the difference between fixed and variable APR?

A fixed rate of APR means that the rate charged will not change throughout the loan term. Most payday lenders have a daily interest rate of 0.8% or less that is completely fixed and will not change unless the customer falls behind on payments and is required to pay late fees, however, as Mr Lender does not charge any late fees this would not apply and the rate would always remain fixed.

A variable rate of APR reflects a price that changes based on national rates or economic changes. It is common for homeowners to get a mortgage rate that is fixed to the Bank of England’s Base Rate. So if the base rate goes down, they will pay lower mortgage repayments.

What is a representative APR?

The representative APR is the rate that the lender by law gives to at least 51% of customers.

For payday loans, lenders will typically provide the representative APR in their repayment examples. For example, if a lender charges an APR of 1,300%, this is the rate that must be provided to at least 51% or more of successfully funded applicants.

The rate of APR associated with a lender’s product will depend on:

  • The lender's rate
  • The borrowers's criteria
  • Loan term

Most lenders are required to provide a repayment example, which highlights how much interest will be paid, on a certain amount of capital, over a set amount of time. This can provide a more practical example of how much your loan will cost.

Other measures include the daily interest, which has been capped by the FCA at 0.8% per day.

What affects the rate of APR?

The rate of APR charged by the lender will depend on:

  • The lender's rates
  • The borrower's criteria
  • Loan term

Loan and credit providers have the choice of how much they wish to charge for their products. Some industries such as the payday loans industry have a maximum price cap, but lenders will have different rates of APR depending on their competitiveness, risk and their profit margins.

The borrower's criteria and financial situation will impact the rate of APR that they have been given. For those applicants with bad credit, the lender may need to charge a slightly higher rate to manage the risk of default. Equally, if a customer has a good credit rating, the APR may be lower because they are considered less risk.

Whether the loan is secured or not will also affect the rate of APR. The Annual Percentage Rate for mortgages tends to be quite low, at less than 5% per year, because the loans are secured on the individual's property and can be repossessed if they cannot meet repayment. By contrast, a payday loan is unsecured and the borrower does not put anything down as collateral so this is reflected in a higher APR.

Regarding the loan term, if a loan only lasts for a few weeks or months, it will be calculated as though it is open for a year. Since it will be multiplied again and again, it could lead to an APR that runs in the hundreds or thousands of percent.

Why is the APR for payday loans usually so high?

The APR for payday loans tend to run in the thousands of percent and this can be quite off putting. The reason why the figure is so high is because a payday loan only typically lasts for 2 to 4 weeks but to express the cost as an Annual Percentage Rate, the interest is compounded again and again to show what it would cost as if the loan were taking out for an entire year – making it seem much higher than it is.

At Mr Lender, we charge a Representative APR of 1,266.2% for loans that typically last a few weeks or months. Our interest rate per annum is 292% fixed which works to be 0.80)% or simply put 80 pence for every £100.00 borrowed per day. Our rates are considered very competitive when compared to rival firms.

What are the other ways to tell the cost of a loan?

Since the APR can be misleading when comparing the cost of a payday loan, there are other measures that can be used.

Most lenders are required to provide a repayment example, which gives you an idea of the amount, the interest you will be borrowing and how long for. This can provide a more practical example of how much your loan will cost.

Below is a repayment example for a £400 loan for 6 months (based on 30 day periods):
Month Amount owed Capital repayment Interest Total instalment
1 £400.00 £66.66 £96.00 £162.66
2 £333.34 £66.66 £79.80 £146.46
3 £266.68 £66.67 £63.90 £130.57
4 £200.01 £66.67 £48.00 £114.67
5 £133.34 £66.67 £31.80 £98.47
6 £66.67 £66.67 £15.90 £82.57
  £0.00 £400.00 £335.40 £735.40

Other measures include the daily interest, which has been capped at 0.8% per day. There is also a limit that can be charged on £100 over a 30-day period of £124. Any payday lenders charging below these rates, it is considered good value.