The Ultimate Personal Loan Guide Part 2: Chapter Two - Personal Loans Interest Rates

How much is the APR for personal loans? Personal Loans Now provides an in-depth discussion on understanding APR for personal loans.

APR for Personal Loans - Personal Loans Now

Learning Highlights
  • Personal and representative APR for personal loans
  • Comparing APR on credit cards and personal loans
  • Borrowing and the impact on APR
  • Credit scores for loan applicants
  • Alternatives to a high APR

What is APR for Personal Loans?

If you have been searching for information about unsecured personal loans, you will have come across the term APR. This stands for Annual Percentage Rate. It is used by all lenders to show what they charge to borrowers as a rate of interest. This rate of interest includes any extra fees or products associated with the loan. i.e. arrangement fees and insurance.

APR for Personal Loans Explained

All lenders are required by law to advertise loans using the Annual Percentage Rate, although they can also advertise products showing monthly interest rates or annual flat rates. By standardising the way that interest rates advertise, it is easier for potential customers to make comparisons between all the different lenders.

However, an Annual Percentage Rate may be deceptive. It will also include charges other than the interest that the loan will include. The best way to make sure that you get a good deal is to always compare like for like products. This means looking closely at the small print in the terms and conditions.

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APR for Personal Loans

APR for a personal loan is a rate that a lender offers you when you apply for a loan. This figure shows you the rate of interest you will be charged each year if you borrow money. The APR will stay the same for the whole term of the loan.

An Annual Percentage Rate includes any extra fees that may apply such as an arrangement fee. It also reflects the frequency of interest being added to the loan account. This is usually monthly but may be quarterly, every six months or annually.

What Is Representative APR

A representative APR is often called a ‘headline rate’. That is the Annual Percentage Rate figure offered by lenders as a means of attracting more customers. This can be lower than the actual rate the lenders offer you, which is the personal APR.

The headline APR figure can be lower than the lowest personal loan rates the lenders charge you. This is because a lender will assess the APR that they can offer you and to do this they use a variety of factors. These include your employment status, residential status and your credit score and credit record.

Unfortunately, unless you know that your credit score is high, you will never know what APR the lenders offer you.

APR for Personal Loans - Personal Loans Now

You will only find out once you have made an application for a personal loan.

Under FCA regulations lenders may only advertise a representative APR if they make a firm offer of loans at this rate to 51% of all successful applicants. This means that they can offer a much higher rate to the other 49% of applicants.

Remember, lenders are unlikely to offer you this advertised representative price APR if you an unperfect or lower than usual credit record.

What Does APR Mean for Credit Cards

When applying for a credit card, note that the Annual Percentage Rate charged can be a different rate for purchases than charged for cash withdrawals or balance transfers. The APR for these kinds of transactions is usually higher.

The APR for personal loans that are unsecured will usually be fixed. This makes it very useful as a comparison tool that can assist you to get the best deal for your circumstances.

Work out the true cost of borrowing by looking at the following facts:

  • The principal amount
  • Any extra fees or charges
  • The frequency of payments
  • The term of borrowing
  • The rate of interest
  • The total amount payable

APR for Personal Loans - Personal Loans Now

Will Borrowing Large Amounts Reduce The APR for Personal Loans?

Typically, lenders selling personal loans will offer a lower APR if you apply to borrow a substantial amount of money. Getting into high amounts of debt can jeopardise your financial security. Don’t be tempted by lower rates, such as an offer of 10% instead of 15%, for borrowing over a set amount, e.g. £3,000. Think considerably before borrowing a large sum now. It might prevent your access to a mortgage in the future.

Reputable companies will always try to adhere to responsible lending. However, they all want to make higher sales which will lead to more profits. Exercising responsible borrowing will mean that you are in control of your financial situation at all times.

Lower or Higher? How Can I Get A Low APR For a Personal Loan?

Let’s compare the cost of personal loans UK. The loans market is undoubtedly crowded with banks and other financial institutions all vying for business. That said, you may be wondering how you can get the best deal on the Annual Percentage Rate for your loan.

APR for Personal Loans - Personal Loans Now

Although there are many comparison money websites where you will be able to find good deals, it is entirely possible that you will not be offered a low APR when you make an application.

What is the APR for Personal Loans?

Bank base rates are at an all time low, and lenders have reduced interest rates. In just the last two years, typical rates on offer have gone down from 7.5% to around 3.3%. However, if you do have a poor credit score, (and this is not unusual following the last financial crisis) you may not be offered one of the headline representative rates.

One way of increasing your chances of being offered a low Annual Percentage Rate is to improve your credit score. But first, you have to find out what that is. There are a number of credit agencies where you can apply to find out your recorded credit file. Sometimes mistakes are made, and the facts have been incorrectly recorded. So, this is the first place to start.

Equifax, Callcredit and Experian are the three credit reference agencies in the UK. You will be able to find out how your credit worthiness rates by applying for information about your file.

APR for Personal Loans - Personal Loans Now

A limited record of the file details is available for £2. But a full credit file which includes the credit score costs more. Agencies will offer a free 30-day trial, but for this, you must sign up for the service. After the first 30 days have passed, the charges are around £14.95 per month. However, you can cancel your subscription at any time.

How is APR applied to Multiple Applications For Personal Loans

Your credit file records every time you apply for a loan. However, it does lead to your credit score becoming lower. A better option than making multiple applications is to use an online personal loans calculator. This will allow you to see whether you can afford the loan before you make an application.

As well as a personal loan calculator, some money advice website have eligibility calculators which will provide a good indication of whether an application will be accepted

Securing personal loans low Annual Percentage Rate will cut down on the amount of interest you pay and will save you a lot of money. So, improving your creditworthiness is a first step to aim for before you make an application.

APR for Personal Loans - Personal Loans Now

Loan APR: Understanding Your Credit Score

Once you have received your credit score from a credit agency, the figure will show whether you are considered a high or low risk for lenders. Credit scores are calculated from 300 to 850 and the higher the score, the better risk you are deemed to be.

However, each lender may score you differently. Some lenders will consider over 700 to be a good score. Others may approve of a lower figure like 650 to 680.

How Can I Improve My Credit Score for APR rate?

Improving your credit score can take a long time. So, this is the time to think about whether you really need a loan at this particular moment or if it can wait until you can get a better APR for personal loans. Paying bills on time and clearing any outstanding debts are the best ways to improve your credit score. Do this by working out a monthly budget and sticking to it.

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Low APR Loans for Bad Credit

If you want to take out a loan and can only get a high APR, one alternative is to look at taking out a secured personal loan. This type of loan will have a lower APR. However, if you fail to make repayments on time, you are putting at risk the collateral you have used to secure the loan.

If this is your home, then it is a risky route to take when borrowing money. Another alternative is to get a guarantor for your loan. As long as the guarantor is a lending risk you could be offered a lower APR. Finally, look at other options. Loans from a credit union may be a cheaper option for borrowing than going for the high APR offered by big businesses. These organisations will take on someone with a low credit score. Also, don’t write off getting help from family and friends.

The most important factor about taking on a personal loan is to make sure that you can pay it back. Always work out the total cost of the loan and make sure that you understand a number of interest lenders charge you. These factors will help you to decide whether this is the right solution to your current financial situation.

APR for Personal Loans - Personal Loans Now

Summary: APR Definition

Annual Percentage Rate is used by all lenders to show how much interest they will charge for personal loans. Comparing APR from different lenders can help you to get the best deal. Representative APR is not the same as personal APR.

The Annual Percentage Rate may be lower if you borrow more money. Your credit score will help to determine what APR lenders can offer for personal loans. There are alternatives to taking on a loan with a high APR. Read the rest of the Personal Loan Now guide to Personal Loans and Interest Rates for more honest information.

APR for Personal Loans - Personal Loans NowAPR for Personal Loans - Personal Loans Now