What is the APR?

The rate at which the interest rate increases annually is what is defined as the APR. It is often used for calculating the cost of loan repayments so that people can find the cheapest options.

The APR shows people that level of interest that people are obliged to pay from a loan, in addition to any fees that they may be required to pay. All loan providers must disclose the APR before their customers sign a contract. Advertisements for loans will also include a 'representative example' of the typical APR, of which at least 50 percent of customers should be eligible for.

Typically, a long-term loan will command a lower interest rate than a short-term agreement. For example, retail banks like Nationwide or Barclays may offer representative APRs from 6.3 percent for loans of £7,000 or more, whereas short-term loans from companies such as Quick Quid may state an APR of more than 2,000 percent for loans less than £500.

Before signing any loan agreement, customers know the difference between fixed interest rates and variable interest rates. With a variable rate, payments may increase or decrease over time. However, customers on a fixed rate agreement will always repay the same amount.

Customers should also make sure there are no additional fees, such as payment protect insurance costs or penalties for missing a payment or paying off the loan earlier. A loan with a higher APR but a longer contract period will involve lower monthly payments, whereas a loan with a lower APR will involve higher payments but could save customers money in the long-term.

Finally, it is always a good idea to shop around to find the best deals online or from an independent advisor. Sites like moneysupermarket.com or directgov.co.uk provide excellent information and advice for people interested in short-term or long-term loans.

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