  What is APR? Payday loanLenders traditionally use an annual rate of interest because it is easier to compare than a monthly one, and has been used as a standard by the finance industry for many years. What's the difference between Nominal and Effective APR?You will find when looking to borrow money that some lenders will talk about a nominal APR, while others will refer to the effective APR. The nominal APR is the interest rate based just on the interest charged on the loan, and does not include any other product fees or charges. The effective APR can differ from lender to lender, but will include some, or all of the other charges sometimes associated with taking out a loan. An example would be a loan arrangement fee, which may be charged on some loans and would mean the effective rate of interest the customer was paying was higher than the nominal rate of interest. - Example Dave wants to borrow £10,000 from his bank to fund a new car purchase. The bank is willing to lend him the money over a five year period, but will charge £200 to set up the loan in the first place. The nominal APR is 5% on his loan, but the effective APR will be higher, because it will take into account the amount he is charged in interest, and in the one off fee for setting up the loan. How do lenders calculate the APR of my loan?When you take out a loan in the UK your lender has to calculate the APR using one of three different calculations, as set out in the 1980 consumer finance act, and must present the loan interest rate, and their calculations to you before you take out the loan. If you borrow £10,000 at 5% APR over a three year period you will only pay interest on the outstanding balance of your loan. The bank will not charge you 5% of your £10,000 loan and multiply it by three to calculate it over three years, but will charge you 5% of the outstanding balance. The calculations are relatively complicated but you will usually pay interest on the outstanding loan amount on a daily, or monthly basis over the term of the loan. |
