As you look to apply for a personal loan, you are probably in the process of learning about lots of new terms and industry-specific jargon. One term that comes up a lot is APR, and it’s important.
So, if you’re wondering what APR is and how it works on a loan, you’ve come to the right place.
Introducing APR
No matter how you borrow money, you will be required to pay the money back with interest. APR means ‘Annual Percentage Rate’ and brings together the interest and other fees that you need to repay on a loan over a period of twelve months.
APR is really helpful because it shows you all the fees associated with a loan product, meaning you won’t get duped by hidden fees and charges. An APR exists in nearly all aspects of borrowing, meaning you can use it as an easy-to-understand metric when comparing lenders.
Another term that is commonly used in the financial world is Representative APR. When you use a personal loan calculator or see an advertised rate of APR, you will be given a figure that needs to be presented to at least 51% of approved applicants.
It’s this figure that is given as the Representative APR and can be used as a guide on what rate you’re likely to be offered once you have submitted your application.
How to calculate APR?
Several aspects influence your loan APR, including:
- Loan length. One of the key factors when determining APR is the length of the loan. For shorter-term loans, APRs are likely to be higher and vice versa.
- Loan amount. The amount of money that you borrow from a lender will also influence your APR. Larger loans usually lower the rate of APR, while the opposite is true for smaller loans.
- Your personal circumstances. All borrowers are different, so lenders will ascertain whether you’re likely to pay back the full loan amount.
Lenders like Koyo Loans use open banking data to consider your current circumstances, while other lenders look solely at your credit score. Ultimately, what a lender decides about your personal circumstances will affect your APR rate.
How to find better APR rates?
The good news is that there are a number of things you can do to receive higher APR rates from lenders. The best thing to do is to improve your credit score. If you make your payments on time and keep your credit utilization low, you will be able to boost your profile.
Another thing to think about is the institution you’re applying to. Different lenders offer varying rates of APR and have different ways of assessing your suitability.
It’s best to look to open banking lenders, as they use real-time data to gain an accurate picture of your current financial situation.