APR explained

If you’ve ever applied for a loan or credit card, you’ll have come across the term “APR.”

It is a term that confuses many people. But what exactly does it mean? NestEgg cuts the jargon, and explains why higher rates aren’t always as expensive as they seem.

What is APR?

APR stands for Annual Percentage Rate. This percentage reflects the total cost of borrowing over a year.

APR includes the interest on the loan and any additional fees. It’s designed to give borrowers a clearer picture of what borrowing will actually cost on an annual basis.

It’s important to remember that APR is shown as an annual rate. As a result when comparing loans over a shorter period of time, the APR can seem high.

Why does APR matter?

APR makes it easier to compare the cost of different financial products. Whether you’re looking at a credit card, loan, or mortgage, APR allows you to compare products from lenders. In the UK, lenders must disclose clearly and accurately the APR on their products.

Credit unions and APR

You may have noticed that credit unions in the UK, including those on our dedicated comparison platform, typically have an APR of up to 42.6%.

Whilst this figure might seem high at first glance, especially when compared to high street banks or other financial institutions, when broken down, it’s not as high as you might think. Here’s why:

• The 42.6% APR is the maximum a credit union in England, Wales and Scotland can charge. This equates to 3% per month. In Northern Ireland the cap is 12.68% APR (1% per month).
• Credit unions have a variety of loans with a range of interest rates. Depending on circumstances, an individual may be eligible for loans with a lower APR.
• Loans from credit unions are often smaller amounts, so the total amount of interest paid back is less. As an example a £700 loan over 12 months at 42.6% APR will equate to an approximate total of £844 repaid at the end of the loan term (£144 extra paid in interest (or £12 per month))
• Credit unions also use Save as You Borrow schemes which means as you are repaying a loan, the credit union is placing a portion of your repayment into a savings account. This will leave you with a safety net of savings once you have repaid your loan.

What’s the difference between representative APR?

Sometimes, you’ll also see the term ‘representative’ APR. This is a rate that lenders use in their advertising and is offered to at least 51% of successful applicants. For example, you might see a credit card advertised at 19.9% representative APR. However this does not mean you are guaranteed this rate. The actual APR you receive could be higher or lower, depending on your credit history and personal circumstances.

Why choose a credit union?

In contrast, credit unions offer straightforward loans with a fixed APR. This means the rate you see, whether it’s 42.6% or lower (depending on their products), is what you’ll pay – there are no surprises.

Seeing a figure like 42.6% APR can be off-putting. However when you break it down, the monthly costs are often quite manageable, especially for short-term loans, and in comparison to other lenders.

Credit unions are transparent, and their rates are capped to protect borrowers. So, don’t let the numbers scare you away from considering an ethical, affordable loan.

If you are looking for a lender who is community-oriented, financially inclusive, and supportive, it may be worth considering a credit union. Visit our dedicated credit union comparison platform, and find your credit union today.