How do I compare APR's

The term APR is the Annual percentage rate of interest charge. It is the best way of comparing different credit card, loan, mortgages and even savings products. When you apply for a loan, whatever the initial interest rate is on the product the lender has to by law tell you what the APR is before you sign anything. If they won't tell you what the APR is, then do not take out a product with them, as they are probably trying to hide something, or may in some cases be so incompetent that they haven't worked it out.

In general terms, the lower the APR is on the loan, the better the deal is. APRs will vary though from lender to lender, so you should shop around before taking on the loan. A loan is with you for a long time - until you pay it off, so you need to take the comparison of the products seriously. In general, you should never just take the first product offered to you, especially if you are in a store buying a product, because store credit is hardly ever a better deal than a bank loan.

Like most things though, it's not just the APR numbers you need to look at. Don't just accept a low APR as the final definition that the product is the best you can get. There are still some questions that you need to ask about it.

Firstly, you should find out if the charges that are included in the APR calculated are fixed or variable. Should the rate be fixed, then whatever happens to the Bank of England interest rate, or the LIBOR, or any other measure, your loan interest charge and thus repayments will stay the same. If it is variable, then your repayments could go up and down, which could obviously be a good or a bad thing. If you have calculated your repayments carefully to make sure they can be easily handled, then if they go up with interest rates, then it could cause a problem.
Then you should find out if there are any charges not included in the APR. Is there an optional payment protection insurance? If there is, find out what the insurance payments are, and when you'd need to pay them, and think about whether you actually need the insurance. If it has been included in the APR, then the APR could be less without it.

Some loans with low APR balance that with stringent conditions. Find out whether you have a choice about where and how you make repayments. Should you have spare money at hand, can you pay off the loan early, without redemption penalties? You are legally bound by the agreement terms, so read them carefully.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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