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Exactly what is APR, and how is it calculated. This is something I have never understood.
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According to the OFT website "The APR is based on the total charge for credit (TCC) which includes interest and other charges which affect the cost of borrowing - even if they are not payable under the credit agreement itself. The APR is an annualised rate reflecting the timing of such charges, as well as the rates and amounts."
So for example if you borrow �1000 and pay back �1100 spread over 12 months then the interest paid is �100 (10% of the original balance) but the APR is nearer 20% since your interest of �100 applies to an average loan balance of around �500.
The APR is based on the total charge for credit (TCC) which includes interest and other charges which affect the cost of borrowing - even if they are not payable under the credit agreement itself. The APR is an annualised rate reflecting the timing of such charges, as well as the rates and amounts.
http://www.oft.gov.uk/advice_and_resources/res ource_base/legal/cca/apr
So for example if you borrow �1000 and pay back �1100 spread over 12 months then the interest paid is �100 (10% of the original balance) but the APR is nearer 20% since your interest of �100 applies to an average loan balance of around �500.
The APR is based on the total charge for credit (TCC) which includes interest and other charges which affect the cost of borrowing - even if they are not payable under the credit agreement itself. The APR is an annualised rate reflecting the timing of such charges, as well as the rates and amounts.
http://www.oft.gov.uk/advice_and_resources/res ource_base/legal/cca/apr
Excellent link from factor30. If that confuses you, here is an easier way to understand. This is how I expained it to my 18 year old brother.
You apply for a credit card. The apr is 29.9% per year. (This is alsof course varies from card to card) Statements are usually sent out every month. To calculate what you would pay each month you divide that by 12. To round it up it is almost 30% per annum. Each month you would pay approx:
2 .5% interest on your balance. This is a twelfth of the 29.9% apr
You have spent �400 on your credit card. (Each card also varies on how much time you have until interest is applied to your account.) Now the interest is added. So 2.5% of �400 = �10. Now your outstanding balance is �410. You are usually expected to pay a minimum payment which could be between 2-3% of your balance. 2% of your balance is �8.20. 3% of your balance is �12. 30. Only paying the minimum payment means it takes you longer to pay off the balance. If you spend too much, you may find yourself only being able to afford to pay enough to cover your interest only, thus your balance never reduces. You are then in effect just paying interest on your interest for evermore. You can pay off all of the balance every month, perhaps when your wages are paid. Therefore you never have to pay any interest, so you never lose.
This is a two part post as my answer was too long
You apply for a credit card. The apr is 29.9% per year. (This is alsof course varies from card to card) Statements are usually sent out every month. To calculate what you would pay each month you divide that by 12. To round it up it is almost 30% per annum. Each month you would pay approx:
2 .5% interest on your balance. This is a twelfth of the 29.9% apr
You have spent �400 on your credit card. (Each card also varies on how much time you have until interest is applied to your account.) Now the interest is added. So 2.5% of �400 = �10. Now your outstanding balance is �410. You are usually expected to pay a minimum payment which could be between 2-3% of your balance. 2% of your balance is �8.20. 3% of your balance is �12. 30. Only paying the minimum payment means it takes you longer to pay off the balance. If you spend too much, you may find yourself only being able to afford to pay enough to cover your interest only, thus your balance never reduces. You are then in effect just paying interest on your interest for evermore. You can pay off all of the balance every month, perhaps when your wages are paid. Therefore you never have to pay any interest, so you never lose.
This is a two part post as my answer was too long
Part Two:
Its also extremely difficult to get a credit card if you have never had any credit before, because you have no way of proving you are a good risk. So if you want to just use a credit card to build up your credit rating, then it makes sense to buy perhaps your weekly shopping with your credit card. Prove to the credit card people you pay your bills on time, and you never miss a payment. As you buid up your credit score, then you are offered incentives by your credit card company, like cheaper balance transfers, money off vouchers.Some even reduce your apr. You may have your credit limit increased or reduced depending on how you handle your account.
I hope this has been of some use to you HaizeyDays. I have tried to present this in a way that is not patronizing to you, but informative and helpful. If I failed in my attempt I apologise. My brother now fully understands what apr means, I hope you do too. Best wishes.
Its also extremely difficult to get a credit card if you have never had any credit before, because you have no way of proving you are a good risk. So if you want to just use a credit card to build up your credit rating, then it makes sense to buy perhaps your weekly shopping with your credit card. Prove to the credit card people you pay your bills on time, and you never miss a payment. As you buid up your credit score, then you are offered incentives by your credit card company, like cheaper balance transfers, money off vouchers.Some even reduce your apr. You may have your credit limit increased or reduced depending on how you handle your account.
I hope this has been of some use to you HaizeyDays. I have tried to present this in a way that is not patronizing to you, but informative and helpful. If I failed in my attempt I apologise. My brother now fully understands what apr means, I hope you do too. Best wishes.
APRs (as illustrated above) are very complex and are utterly useless except to compare two like for like products
eg if you are comparing a mortgage over 25 years.
As a typical example, which would be better - a 24 month loan of �5000 at 7.9% APR or a 3 year loan for the same amount with a 5.9% APR
The former (although a higher APR rate) would make you pay back �421.80 in interest, the latter would be �467.80 - so although the APR is 2% lower, you are paying back an extra �46
To further confuse you - because APRs are Annual rates, short term borrowings are misleading - eg borrowing �25 over 2 weeks with an interest payable of �2.50 would give an APR of over 3 figures.
As I said, APRs are confusing and useless except for comparing identical loan terms.
eg if you are comparing a mortgage over 25 years.
As a typical example, which would be better - a 24 month loan of �5000 at 7.9% APR or a 3 year loan for the same amount with a 5.9% APR
The former (although a higher APR rate) would make you pay back �421.80 in interest, the latter would be �467.80 - so although the APR is 2% lower, you are paying back an extra �46
To further confuse you - because APRs are Annual rates, short term borrowings are misleading - eg borrowing �25 over 2 weeks with an interest payable of �2.50 would give an APR of over 3 figures.
As I said, APRs are confusing and useless except for comparing identical loan terms.
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