Borrowing guide - annual percentage rate

UK Loan APR (Annual Percentage Rate)

	Loan A	Loan B
Term of loan	5 years	5 years
Loan value	£1000	£1000
Set-up fee, added to loan	£200	£100
Interest rate	5%pa	10%pa
Interest (approx)	£125	£250
Closing fee	£200	£100
Total cost of loan	£525	£350
APR (approx)	21%	14%

In the UK, APR (annual percentage rate) is an evaluation method applied to all loans provided by companies that are regulated by the FSA.

There are a number of different costs associated with taking out a loan, such as set-up costs, administration costs, interest and account closure costs.

These costs vary from lender to lender, from loan type to loan type and from loan to loan.

This array of charges makes it very hard for borrowers to directly compare the costs of different loans. To allow direct comparisons, APR was formulated.

APR is the entire cost of a loan over the term, expressed as an annual percentage. The table demonstrates the point.

As banks exert greater effort to advertise their interest rates, Loan A initially appears cheaper than loan B. However, taking other charges into consideration, we see from the APR that Loan B is cheapest.

Lenders are required by law to disclose the APR. You will always see this on adverts in the UK. However, it will normally be harder to see than the interest rate, as it is often displayed in small text.

APR does not take account of charges that do not occur in the normal course of a loan. Such charges include penalties, etc, that may be applied for breach of the agreement by the borrower.

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