An APR is a percentage that represents how much a loan will cost you annually. It is known as an annual percentage rate. It includes interest rates and associated fees. Many financial experts suggest checking the APR of a loan as this will help you know whether or not the loan is expensive.

For instance, if you borrowed £100 for 14 days at 392% APR, you would pay off £115 on the due date. But if you borrow this sum for a whole year, you will end up paying off £491.

If the repayment size is just 14 days, you may not find the debt expensive. But this will cost you four times if you extend the repayment term for full one year.

Unfortunately, this is half truth. Late payment fees and interest penalties will be added if you keep rolling over the loan for full one year. This will significantly add up the cost of the debt.

You can determine whether a loan is expensive or inexpensive by only measuring the APR. The APR is calculated using the following formula:

What are the types of APRs?

There are two types of APRs:

• A fixed APR that does not change, remain fixed throughout the loan term even though the base rate goes up and down.
• A variable APR that keeps changing throughout the loan term in relation to the base rate by Bank of England.

Here are some key points to bear in mind:

• Small loans including personal loans and small secured loans carry fixed APRs.
• Mortgages are normally subject to variable APRs. However, the initial period of a mortgage, which is not more than five years, will be subject to fixed interest-rate deal and then you will be put on the standard variable rate.

Why do lenders charge high APRs?

An APR that a lender charges includes interest rates and associated fees that include:

• Monthly fees
• Processing fees
• Card fees (in case of a credit card)
• Administration fees
• Other charges

Of course, the APR will be higher than interest rates. However, APRs vary between lenders because every lender has their own criteria to charge fees. For instance, some lenders might charge monthly fees while others may not. What makes a loan so expensive is the interest rate.

You often have heard that it is not easy to determine the interest rates you will be charged before putting in a loan application. This is because a lender will have to peruse your credit score and financial situation – two important factors to influence interest rates that a lender will charge.

• When your credit score is good, you will certainly get better interest rates.
• When your credit score is bad, your lender will charge high interest rates.

It is paramount to note that your good credit score cannot guarantee that you will get very low interest rates as your financial situation may not seem to be strong enough. A lender will determine the risk involved in lending you and on that basis they will charge interest rates. They will charge high interest rates when the risk is high.

Can you find a low APR loan?

Finding a low APR loan is not a cinch, but it is not impossible either. Here are some suggestions to grab a loan with a low APR.

• You should maintain your credit scores up to snuff. A higher credit score will improve your chances of getting better interest rates.
• You should try to do up  your financial situation. Grab a side gig or find a part-time job.
• You should look for seasonal offers. Some lenders reduce interest rates during the festive season like Christmas.
• If you want a loan to fund your higher studies, you can qualify for lower interest rates based on your academic and professional credentials.
• Compare APRs and interest rates, so you choose a lender that offers the best deal.
• For secured loans like mortgages and auto loans, you should consider putting down a bigger deposit.

As long as you prove that you can repay the debt smoothly despite your financial life is turned upside down, you can avail yourself of lower interest rates.

The bottom line

There are chances that you get better interest rates if your credit score and repaying capacity are good. Keep in mind that this rule is applicable to personal loans and secured loans.

If you are borrowing a smaller sum, you may not be able to get the best deal. It is always advisable to do the research work beforehand. Use online loan calculation methods to determine the estimated cost. This will help you know whether this fits in your budget. Keep in mind that the actual cost will be much higher.

You can also contact a couple of lenders to know the range of interest rates they charge. Take advice from them on how you can improve your chances of getting low interest rates.

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