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APR (Annual Percentage Rate)

Everyone in the business of lending money or advancing credit is required by law to quote this rate. The APR is calculated by adding all costs associated with the loan and compounding interest whenever it is charged (typically monthly). For example, a well-known store card charges 2% per month. The APR is 26.8%. To give you some idea of what this means, suppose you borrow £1,000 on this card, and pay the minimum amount of 4% each month. The loan will take you almost 10 years to pay off, by which time you will have paid over £1,000 in interest as well as the £1,000 you borrowed.

Personal loans, credit cards, mortgages and overdrafts may all be quoted at attractive rates of interest for an introductory period. But those rates often fail to include arrangement fees and they may not reflect any higher rate of interest that will apply after the introductory period. The APR is intended to show the ‘true’ cost of borrowing by taking into account these other factors. It was originally introduced as part of the Consumer Credit Act of 1974.

 

 

 

12 April, 2008
 
© 2008 K.R.Wade and Co Ltd