The rough guide to APR
The Annual Percentage Rate (APR) is the amount of interest charged on loans by lenders, including credit card companies. The APR on a credit card determines how much you have to pay back each month to cover minimum charges and interest on the credit card loan. It is calculated as a monthly charge multiplied by 12, depending on the balance of the card. For example, a card with a 10.2% APR (divided by 12) would give a monthly interest rate of 0.85% on the outstanding balance. On a 1,000 loan, this would equate to an interest charge of 8.50 a month. The total amount would depend on how much of your outstanding balance you paid off each month and if you made only minimum payments or additional payments to clear the balance.
APR is a useful comparison tool when selecting credit card offers, but there are key factors to remember when looking at the numbers. Consider the interest rate you have to pay, how you repay the loan and the length of the loan agreement. Also look closely for any additional fees associated with the loan, such as payment protection insurance. All lenders have to disclose their APR before you sign any agreement, and as the APR has a direct bearing on the cost of your loan shopping around to find the best deal is basic common sense. Don't be fooled by offers that appear too good to be true - they probably are. Responsible card lenders will give you all the facts and figures you need to make an informed decision.
Once you have found what appears to be an attractive APR rate, there are a few more questions you should ask the lender before committing to any agreement. The first of these is if the APR is fixed or variable. If the rate is variable, what may seem like an attractive offer in the first instance may change dramatically after an initial introductory period. A variable rate will also be affected by any changes in the base interest rate, set by the Bank of England. With variable rates, your payments can go down as well as up, so it pays to check the fine print. With a fixed rate, your repayments stay the same.
Look closely for hidden costs that are not included in the APR, the most common being payment protection insurance. With some lenders this isn't an optional extra - it's a requirement. It can offer you a measure of protection should your circumstances change, but there's always the chance that you'll be paying for an insurance policy that you don't actually need. Again, these charges are fully disclosed by the lenders - it's up to the consumer to make the decision as to whether they need the additional insurance or not. It's also a good time to check that your finances could cope with the additional expense of a credit card and the repayments incurred. A longer term repayment timescale may seem tempting because of lower APR, but factor into that equation the length of time you will be repaying both the loan and the interest charges and it could work out more expensive than you thought.
Finance and lending is a complex area, and APR is no exception. The Government and financial regulatory bodies recognise this, and have put safeguards in place to protect consumers to make sure that all lenders comply with basic guidelines. The lenders, in return, are happy to comply with this stipulation, as it shows the public that the credit card companies are open and accountable. The APR attempts to create a single figure of interest on a loan amount, so that consumers can compare companies offering the same amount. The loan amount doesn't change - the APR is the variable in the equation. By shopping around, consumers can find the best deal with the lowest overall APR. The same applies to credit cards. Many cards offer 0% introductory periods and then either a fixed or variable amount of APR once the introductory period has expired. The trick here is to look past the initial incentive of 0% and calculate what the later APR rate will mean to your repayments.
Without examining all the facts and figures, it is impossible to make an informed decision as to which credit card offer is right for you. APR offers consumers a flashlight to light their way along the dark paths of personal finance and credit card agreements. By spending a little time looking at all the offers a good deal can be found that ticks all the boxes whilst avoiding hefty charges. Don't just be drawn in by the lure of the glitzy 0% boys - more long-term options may seem dull in comparison at first, but could be kinder on your bank balance in the long run.
About the Author
Jo Smart writes for various popular websites and is an expert at explaining financial topics. You can find out more about Low APR Credit Cards and other Credit Cards here.
Source: http://waymore.info