APR stands for the ‘Annual Percentage Rate’ and is the simplest way to measure the cost of financial products and compare them effectively. With all types of loans, credit cards and mortgages across the UK and the world using APR as their yardstick, one can determine the cost of the product and make informed decisions over its price.
As an ‘Annual’ Percentage Rate, it refers to how much the loan or product would cost if taken out for an entire year. So for loan that only last a few weeks, it is typically compounded until it reaches the APR figure.
As the online loans industry is regulated by the Financial Conduct Authority, it is essential that every lender, including The One Stop Money Shop, clearly presents the APR and cost of a loan to every customer that applies.
Why is the APR for payday loans so high?
Payday loans and other high cost products are commonly criticised for having APRs of 1,000% or more. The reason for such a high number is because the average loan only lasts a few weeks or months and when compounded to become an annual rate, it will tend to run in the hundreds or thousands of percent. (source)
For this reason, it is worth using other cost indicators when comparing payday loans such as looking at the cost of borrowing £100, which is capped to £24 per £100 borrowed, and the daily interest rate, which is capped at 0.8% per day.
The One Stop Money Shop offers an alternative to payday loans, where customers can choose to borrow over 6 or 12 month loans and our representative APR is 295.60% APR.
What is representative APR?
The representative APR is when the rate (or a lower rate) is given to at least 51% of successful candidates that are approved. You may see loan products are regularly advertised as ‘representative’ and this means that more often than not, this will be the rate that is provided.
However, every individual applicant is different and their loan will vary based on loan amount, duration, credit history and affordability, so even if they wish to borrow £1000, it is common that the representative APR will vary slightly.
What is typical APR?
The typical APR means that this is the rate given to at least 66% of successful loan candidates, whereby two out of three customers will get this rate.
Fixed vs variable APR
APRs will come in the form of either fixed or variable. When fixed, it means that the rate charges will remain the same during the entire loan duration – so you know exactly how much you are paying each month and there are no changes. This is very common for personal and instalment loans.
When the APR is variable, it means that it is subject to change and go up or down during the loan duration. So if you have the loan open for 12 months or 36 months, the rate you pay each month may go up or down depending on market changes. This is less common for short term finance, but very common for mortgages which are usually taken out at a fixed or variable rate.
For some people, they prefer knowing exactly what they are paying each month and can budget accordingly. Hence, the fixed option is a good fit. For others that accept a variable rate, they consider that the rates could go down and they could make a saving as a result.
Why was I not given the APR advertised?
Every customer is different and there are various factors that could change the rate they receive, and therefore they do not get the rate advertised. As explained below:
Credit rating: Those with good credit ratings are typically able to receive better rates on their loans (and credit cards). This is because they are deemed a lower risk of default and the lender rewards this accordingly with a lower rate. However, for those with a bad credit rating or history of missed payment, there is a greater risk to the lender that the customer might default. With this in mind, the lender may charge a higher APR, different to the one advertised, to overcome this potential risk.
Loan term: As mentioned, APR is based on an annual calculation, so those with shorter loan terms might see higher APRs because the cost of the loan is compounded until it makes up one year. So if you opt for a shorter term product, you could expect a higher APR.
Affordability: Some customers will have different monthly income and expenditure and to manage this effectively, some lenders may charge higher or lower rates to mitigate their risk.