If you’re looking to apply for a personal loan, you may have come across a variety of different phrases commonly used by lenders. One of those phrases is APR.

What is APR?

Your loan repayments will be made up of two main components, the funds you have borrowed known as ‘the principal’ plus interest on those funds paid over the life of the loan which is worked out as a percentage of the principal. Some lenders will also bundle in fees and charges which will increase the cost of the loan.

APR stands for ‘annual percentage rate’ and shows the amount of interest plus any additional fees and charges that will be charged on your loan on an annual basis. It’s a useful way to compare loan offers from different lenders because it includes fees and charges which could otherwise be hidden, as well as the interest to be paid.

Representative APR is another commonly used term and is a little different from a ‘normal’ APR rate. Representative APR is a figure that a finance provider must offer to at least 51% of approved loan applicants. Whilst this provides an indication of the kind of rate you will likely be offered it doesn’t guarantee that you will be offered that rate.

How can I work out what my APR rate will be?

Your APR rate will vary depending on a variety of elements. These are three of the main factors that will determine the APR rate you’ll receive on your personal loan.

Loan length

The length of your loan is a key factor in determining your APR rate offering. APRs will likely be higher for shorter-term loans and longer for longer-term ones.

Loan amount

The amount you choose to borrow from a lender will also have an impact on your APR rate. In contrast to loan length, a smaller amount will increase APR, while a larger loan will lower APR.

Your financial circumstances

Every borrower is in a different financial situation, so it’s important for lenders to ensure that borrowers are in a good position to pay back a loan in full. For this reason, lenders will look at your credit report and may also use Open Banking data to fairly assess your finances. Ultimately, this will have a signifiant impact on the final APR offered.