If you’re thinking of taking out a loan, mortgage or applying for a credit card, you’ll probably encounter the terms APR and APRC. Both relate to the interest you will end up paying, and it’s essential you understand what they mean, why they are used and the differences between them before signing any credit agreement.
What Is The Difference Between APR And APRC?
Both APR (annual percentage rate) and APRC (annual percentage rate of charge) let consumers know how much interest they will be paying when they take out a credit agreement. APR is used for personal loans, credit cards and hire purchase agreements. APRC is used for mortgages and secured homeowner loans. APRC was introduced in March 2016 (before that APR was used for mortgages) and so not as many people are familiar with the term or what it means.
What Is APR?
APR is the interest rate you pay on loans, credit cards or hire purchase agreements. It tells you how much you will pay every year for lending money. For example, if you took out a personal loan of £10,000 at 5% APR, the loan would cost you £500 a year until it was repaid.
To confuse things slightly, however, there are two types of APR you need to be aware of when applying for credit:
- Representative APR: The rate 51% of people applying for a specific loan, credit card or hire purchase agreement will pay. This means that 49% of people will pay more than the representative APR. Lenders use the representative APR to allow people applying for credit to compare products, but they don’t guarantee any applicant this rate. For loans, the rate can change based on how much is being borrowed so remember to include the amount you want to lend in any comparisons you are making.
- Personal APR: The rate you will personally pay for taking out a loan, hire purchase agreement or credit card. Your personal APR is influenced by your credit score and could be significantly different from the representative APR, so it’s important to check what interest rate you are paying before you sign a credit agreement.
What Is APRC?
APRC is one of three rates you will be given when applying for a mortgage; the others are the initial deal rate and follow-on rate. The initial deal rate is how much interest you’ll pay for a specific period at the start of your mortgage if your lender offers you an introductory deal. The follow-on rate is the interest you’ll pay once that deal has come to an end.
The APRC looks at both these rates and any other fees that you might be required to pay for your mortgage and calculates a percentage that clearly shows you just how much your mortgage will cost you every year until it is paid off.
All mortgage lenders are required to publish the APRC, so people taking out a mortgage understand just what they are paying back. This means the introductory rates don’t lead to confusion when they are comparing mortgage offers.
What Else Should You Consider As Well As APR And APRC?
When you are taking out a mortgage, it’s important to remember that the APRC makes an assumption you’ll not change lender during the life of your mortgage. If you are likely to move to a new house, or change lender for other reasons, during this time, you need to consider this because it might mean a cheaper introductory offer versus a longer-term lower interest rate is a better option for you.
When you are applying for credit cards, how you plan on using them is something you need to consider along with the APR. Applying for a card with a higher APR, for example, might not be as crucial if the lender is offering 0% APR on balance transfers and you plan on doing just that: for you, this would probably be a better deal than for others.
Why Do You Need To Look At The APR Or APRC?
As a borrower, you need to look at the APR or APRC, so you can understand what you will be required to pay back in interest on any loan, mortgage, credit card or hire purchase agreement you take out. Understanding what interest you’ll be paying, and how much taking out credit will actually cost you, you can better compare offers and make informed financial decisions. In the long-run, it may well save you money.