APR calculation explained
The APR calculation can vary
between lenders but is
normally calculated by using
the interest rate,
booking fee and any arrangement fees.
The APR can be affected by
any special incentives
offered by the lender, for
example discount periods or
cash back offers, and will
vary depending on whether
interest is calculated daily
or monthly.
The APR calculation should
provide a clear indication
of the total annual cost of
credit over the
lifetime of a loan.
Sometimes the APR is given
as a monthly rate so we've
created an
APR to monthly calculator
which should help you make a
comparison to the annual
figure
APR calculation example
A lender can make a
loan appear attractive by
quoting a low initial
headline rate for a 25 year
mortgage. For example an
interest rate of 2.5% fixed
for the first 3 years can
seem a good deal to a
potential borrower.
The additional costs not
reflected in the headline of
the mortgage above rate may
include a £995 application
fee, £595 valuation fee, and
early repayment charges of
5% within a 3 year tie in
period. Once these costs are
identified the headline rate
begins to look much less
attractive.
The APR is designed to take
into account these extra
charges and could be more
like 5.9% compared to the
2.5% headline rate initially
quoted by the lender. The
APR calculates the cost of
finance as an average rate
of interest over the 25 year
term of the mortgage.
When advertising loan
products, a lender will
often quote a "typical APR".
Many lenders set the actual
interest rate charged
according to the borrower's
credit record and financial
background, so the APR can
vary significantly for
different applicants, and
can be much higher than the
typical APR.
Overall the typical APR
quoted should be available
to at least two thirds of
potential customers, so this
will need to be taken into
account before a lender
publishes their figure.
If in doubt please speak to
an Independent Financial
Adviser who can provide
impartial advice.
