Annual Percentage Rate

Many lenders have immediately clung to this new definition of Advertised APR, so almost half of those who apply, even with spotless credit records, may not get the Advertised APR. What's worse, there is no legal requirement to quote the average APR that is actually charged, so the original concept of using APR to help compare the cost of credit is now pretty much damaged beyond repair.

The APR is all we have for the moment, until some bright spark comes up with something better.

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The Annual Percentage Rate (APR) is a magically derived number that can be used to compare the cost of credit between lenders. Annual Percentage Rates were introduced by the Consumer Credit Act 1974 to force lenders to include all elements of purchasing credit that are incurred in the first year, such as arrangement fees.

Although calculating the Annual Percentage Rate is straightforward for a personal loan or for a mortgage, it is a nightmare for credit card borrowing. The use of a credit card varies so much that assumptions are made on how much of the credit card debt is outstanding is repaid each month, and when in the month the payment is actually made. Similarly, APR is virtually useless as a measure when comparing the costs of payday loans.

Each credit card company makes its own assumptions on usage; there is no standard or prescribed model – and this is where some magic applies. Because of this, Annual Percentage Rates quoted by credit card companies should therefore be used as a rough guide, as your own experience may produce a different cost of credit, either much lower or higher, depending on many factors.

If you are looking to take out any form of credit, then you should try and get the lowest Annual Percentage Rate that you can, as this will be the total amount of interest that you are expected to repay over the course of your agreement. Ensure that you read the Summary Box fully to understand when any introductory offers expire and the subsequent Annual Percentage Rate that will then apply.

In general, the better your credit rating, the lower the Annual Percentage Rates are available to you. To find credit matched to your credit rating, and which will improve your chances of being approved for credit first time, we recommend that you use our credit finding service.

Be wary though of what is termed the Advertised APR - this may well not be the rate you pay. It used to be that lenders were required under UK law to ensure that at least 66% of all applicants received the Advertised APR. The European Consumer Credit Directive 2008, which came into force on 1 February 2011, said that the "representative annual percentage rate must reflect at least 51% of business expected to result from the advertisement".

Many lenders have immediately clung to this new definition of Advertised APR, so almost half of those who apply, even with spotless credit records, may not get the Advertised APR. What's worse, there is no legal requirement to quote the average APR that is actually charged, so the original concept of using APR to help compare the cost of credit is now pretty much damaged beyond repair.

The APR is all we have for the moment, until some bright spark comes up with something better.

Jargon Buster

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