APR, or Annual Percentage Rate, can make comparing loans a tricky task. While lenders are obligated to state the APR on their websites, it’s not necessarily the best way to make sure you are getting the cheapest loan for your needs, especially if you are looking for a loan with a loan term of less than 12 months.

This is because APR works on the assumption that you are borrowing over multiple years and that you are making regular repayments to reduce the debt. With the majority of lending products, you will make monthly repayments towards your loan or revolving credit product; even if you have an initial “no-payments” period, you will eventually start repaying the loan, usually on a monthly basis.

It is important to note that APR and actual interest charged are not always the same thing and trying to use APR to compare short term loans can actually make things more confusing. While APR is still an important factor, you shouldn’t base your decision to borrow solely on the annual percentage rate. You should also consider how much you are looking to borrow and for how long, because borrowing £100 at over 1000% APR for a month will cost far less than borrowing £1000 at an APR of 20% for a year. You should only ever apply for the amount you actually need to borrow to avoid paying unnecessary interest and fees.

The Definition of APR

Annual Percentage Rate is the rate of interest charged for your borrowing over one full year.

You might see Representative APR or Typical APR when you are on a lender’s website or in store and there’s only a small difference:

  • Representative APR: the rate of interest which at least 51% of borrowers are charged by that particular lender.

  • Typical APR: the rate of interest which at least two thirds of borrowers are charged by that particular lender.

What this means for you as a consumer is that while the majority of that lender’s customers are charged a particular rate of interest, you are not guaranteed to be charged the same. Whenever you apply for a loan or credit product, you should always check the loan agreement carefully.

APR Myth Busting

  • Annual percentage rate is not the only way to compare a loan
  • APR is not equal to the amount you repay, even if you borrow for exactly one year
  • An APR of over 1000% does not mean you repay over £1000 for your borrowing

Examples of APR

To help make annual percentage rate a little clearer, we’ve done some calculations below so you can see exactly how much it would cost to borrow and see how APR affects your repayments depending on the length of time you borrow.

Example 1a:

You borrow £100 for 1 day at an APR of 1668%

The total amount repayable is: £100.79

Example 1b:

You borrow £100 for 1 year at an APR of 1668%

(without making any interim repayments)

The total amount you repay is: £1768

Example 2a:

You borrow £1500 for 1 year at an APR of 20%

(making regular monthly repayments)

The total amount you repay is £1649.25

Example 2b:

You borrow £1500 for 5 years at an APR of 20%

The total amount you repay is £2200.35

APR and Short Term Loans

For short term loans, you will rarely be able to borrow for a whole year, so having an annual interest rate is not actually that helpful or relevant. The best way to compare loans is by the actual amount it costs you in pounds and pence – and all loan agreements should state the total amount payable before you sign the contract. In fact, most should give you a quote on their website when you start the application. If it doesn’t, you should get in touch with your creditor or you can even check the FCA register to make sure they are an authorised and regulated lender.

If you have a revolving credit product, then the repayments are going to be slightly different. You will have an APR interest rate, and for products like credit cards, this is a good way to compare them, but it’s also important to check how the minimum payments are calculated. If you can’t afford to repay your full balance one month, the minimum payment is the amount you must repay to stay within the terms of your credit agreement and to avoid being charged any default fees.

APR at cashasap.co.uk

At cashasap.co.uk, like all authorised lenders, we state the APR on our application pages. You can see it on our homepage, for example, that we state a Representative APR of 1297%. However, that doesn’t mean you would have to repay thousands for borrowing £100. As a short term direct lender, we don’t lend for more than 3 months, and if you did borrow £100 from us for 3 months, it would cost you £149.26 in total, which might be quite a lot less than you would imagine if you’ve never used the service before. Similarly, with our payday loans, if you borrowed £100 for 1 day, then it would only cost you 79p in interest.

This is because APR and actual interest charged are not necessarily the same thing and when it comes to short term loans, the per annum interest rate, often noted as p.a., can be a more insightful figure with which to compare short term loans.

The 79p it would cost you to borrow £100 for 1 day is based on our 290% per annum interest rate. The easiest way to work out how the daily interest will be calculated is by dividing the stated p.a. interest rate over the number of days in the year (this will always be 365, regardless of whether it’s a leap year). For example, 290 / 365 = 0.79%. This means it will cost you 0.79% of the amount you borrow each day.

You can then multiply the amount by the number of days you are looking to borrow to find out how much the total interest will be, although loan calculators on lenders’ websites will do this calculation for you.

Short Term Loan Caps

In any case, the total repayment on short term loans is capped at double the amount borrowed, so even if you missed all of your agreed repayments you would never be charged more than £200 for borrowing £100. Although it’s important to note that reaching the maximum cap on your repayment is not a good achievement.

If you do miss your repayments, get in touch with your creditor straight away to find out what your repayment options are. Your lender should want to help you repay in a way that you can afford so they will work with you to arrange a fair and reasonable repayment plan. Alternatively, you can get in touch with a free and impartial debt advice service, such as StepChange, who can tailor the advice to suit your particular circumstances.