What is Apr and How Does it Actually Affect Me?

By: Onome Okwuosa

We are always hearing the term 'APR', but do you actually know what it means and more importantly what it can affect and how? Well here is APR 101 and hopefully the following article will clarify what APR is and some of the important things it can affect; from your credit card to your car finance agreement.

In short APR stands for the 'Annual Percentage Rate' of charge. The very fact that different companies can offer different rates of APR shows that there is some fluidity in its' structure. Where one company appears to be offering a smaller APR and thus a better deal, you have to ask; where will they recoup those 'losses'? One needn't think themselves pessimistic if this is where your mind goes, what it shows is that you have an eye for patterns that can potentially save you thousands of pounds!

The APR being offered to you has a huge impact on a number of factors; the rate of interest you must pay to the creditor, how you make repayments on the account, whether it's a loan or credit card agreement. If there are any fees associated with the agreement be it in relation to; late or missed payments or any other fees. The premiums associated for such services as 'payment protection' if the lender chooses to make such services compulsory.? Due to its huge influence in any financial agreement the law dictates that all lenders have to tell you what their APR is before you sign any agreement. As mentioned above, APR has no fixed form and it's amount can vary from lender to lender. As a general rule of thumb, the lower the APR the better the lending deal is for you, so when it comes to committing your monthly payments to a lending company it is in your best interests to shop around for a good deal.

Once you have sourced a lender with the most attractive APR it's time to make sure you will be able to maintain the financial relationship. To do so, you have to ask the lender a number of questions; get to know what he's all about so you can make an informed decision to commit to him and his terms and agreements. One of the most important questions is about whether the APR is fixed or variable? If the APR is fixed then your monthly payments will remain the same if your credit balance remains the same for any length of time. However if in the small print the agreement states that the APR is variable then there is a chance that after an introductory period of let's say 12.5% the rate will not only jump up to 17.6% but will vary thereafter. Once you have exhausted your introductory period and you will now being charged the higher rate of 17.6%, from this point if you're lucky the rate may drop to 15.2% thus you save some money while the rate is in that state. However this also means that the rate can potentially increase, and increase and increase so you could see the rate hit 19.7% and then 22.7% and well keep going, the sky's the limit!

Another area in which the sky's the limit is when it comes to other charges made by the lender for certain services such as payment protection, an insurance that in the unfortunate occurrence that your life takes a turn for the worse and you are unable to work, the payments will cover your payments, either for a set number of payments, a particular length of time or until the amount is paid off. If the paperwork has an amount calculated to include such insurance, is it a compulsory feature and if so how much is the full cost of said service and when are you expected to make such payments?

Being fully aware of all the factors that are involved in obtaining credit should contribute to your ability to source, spend and eventually save money, thus making your pennies stretch that bit further and making your pound work that much harder for you.

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