Understanding Representative APR

When comparing personal loans, one of the most common financial terms you'll stumble across frequently is APR. APR is short for annual percentage rate. It is a term that refers to the compound interest rate lenders charge borrowers over a period of one year. In short, APR tells you how much your loan will cost in a year. This is inclusive of interest rates as well as other related fees like processing fees and annuals fees.

Credit card providers as well as pretty much every other lender in the UK market use APR to advertise their loan offers. Take for instance logbook loans. These products are generally advertised to have Representative APRs somewhere between 300 and 400%. Some lenders may offer lower than that thanks in large part to the stiffer competition among lenders.

Before delving deeper, you need to understand that there are two types of APR. One is the personal APR and the other is the representative or typical APR.

As the name suggests, personal APR is the actual interest rate you will need to pay for once approved for a loan. This APR may or may not differ with the advertised APR. Just because the representative APR is 300% for your logbook loan doesn't mean it's the personal APR. It may change according to some factors and whenever your lender deems it necessary or appropriate.

The representative APR, on one hand, is exactly what its name stands for. It is simply a representative of what you may be charged for the loan over a period of one year. This is what most lenders in the UK use to give you an idea of the loan's cost. But again, it is not the exact APR you will get in the end. It may be lower or higher than the representative APR depending on key factors.