Comparing loans using the APR
Last updated: Sep 07, 2016
APR stands for Annual Percentage Rate of charge. It incorporates different factors such as the base interest rate one must pay, how the loan is repaid, the length of the loan agreement (or term), frequency and timing of instalment payments, amount of each payment and certain fees associated with the loan. Normally, the lower the APR, the better the deal for the borrower.
When calculating the APR the following assumptions apply:
- If the contract does not specify a credit limit, the amount of credit granted shall be deemed to be circa Eur1860
- If there is no fixed timetable for repayments, and such fixed timetable cannot be deduced from the terms of the agreement and from the means for repaying the credit granted, the duration of the credit shall be deemed to be one (1) year;
- Unless otherwise specified, where the contract provides form more than one repayment date, the credit will be made available and the repayments made at the earliest time provided in the agreement;
- In the case of credit agreements containing clauses allowing variations in the rate of interest and the amount or level of other charges contained in the annual percentage rate of charge, but unquantifiable at the time when it is calculated, the annual percentage rate of charge shall be calculated on the assumption that, interest and other charges remain fixed, and shall apply until the end of the credit agreement.
So, to sum it up, the APR is not the interest rate charged by the bank or whoever is giving the credit. It is a practical way to compare offers. If you intend to use the APR to compare offers, make sure you compare like-with-like, and exclude variables which should not be taken into account.
This rate of charge takes into account fixed or variable interest rates and any additional costs. It is used to compare rival competitor offers on a like-for-like-basis.
For example: Loan A is granted with 6.5% interest rate whilst a loan B is agreed at a lower rate of 6%. At first, loan A appears to be more expensive than loan B. However, loan A’s additional costs (mainly the annual fee) are far lower those applied for loan B. In the end the total cost of borrowing for loan A is lower than fo
According to the Consumer Credit Regulations 2005, all credit agreements should have a statement of the annual percentage rate of charge and a statement of the conditions under which the APR may be amended.
You need to remember that the APR is a practical way to compare offers, but not to calculate monthly repayments or instalments. The APR is not the interest rate charged by the bank or whoever is giving the credit.
In the APR calculation, exclude the following:
- Charges payable by the consumer if he does not comply with his contractual obligations;
- Charges, other than the purchase price, which you pay, whether the transaction is paid in cash or by credit;
- Charges to transfer funds and charges for keeping an account;
- Membership subscriptions to associations or groups arising from agreements separate from the credit agreement;
- Charges for insurance or guarantees except where these are imposed by the creditor;
- In the case of home loan agreements, any charges payable to persons other than the creditors; and
- Charges which would only be payable where the credit is not utilised, or only partly utilised, or where the customer requests a rescheduling of payments, or where the customer repays early.
The APR is calculated immediately prior to the conclusion of a credit agreement. It is also calculated on the assumption that the credit agreement is valid for the period agreed upon, and that the creditor (such as the bank) and the consumer fulfil their obligations under the terms and by the dates agreed to.