August 8, 2016 2:07 pm Written by

Understanding APR

APR refers to the Annual Percentage Rate and it allows customers to compare financial products such as loans, credit cards and mortgages.

Expressed as a single percentage, the APR is used by all financial providers across the world and is the easiest way for consumers to see the cost of borrowing and compare across different financial products.


Our website allows borrowers to compare guarantor loans and the most simplest way to do this is by looking at the APR for each lender which ranges from 39.9% to 59.9%.

The APR is a way that lenders can be transparent about their costs and it must always be shown to the borrower before they sign the loan agreement. It is therefore a requirement of the Financial Conduct Authority that lenders clearly display the Representative APR with all their financial products.

APR includes the following:

  • Interest
  • Arrangement fees
  • Admin fees

Examples of APR for different financial products 

Representative APR Source
Mortgages 2.94% – 3.69%
Credit Unions 13.68% (12 month loan)
Credit Cards 21.6%
Guarantor Loans 39.9% to 59.9% (1-5 year loan)
Payday Loans 1248.5% (6 month loan)

The difference between Representative APR and Typical APR 

You may notice that most loan companies present APR as ‘Representative APR.’ This means that this is the rate that will be given to at least 51% of successful applicants so you must be aware that you may not actually get the rate that has been advertised. Whether or not you get this figure will depend on various factors such as how risky you are to the lender and the length of your loan.

For instance, those that pose a higher risk of default to the lender may be charged a slightly higher amount as a result – and this needs to be reflected in the APR. For instance, guarantor loans for tenants present a slightly higher risk than a loan with a homeowner because the guarantor could potentially move from their location at any point and be harder to contact. Hence, the APR for a tenant guarantor product is closer to 59.9% than the cheapest version at around 39.9%.

The ‘Typical APR’ refers to the rate given to at least 66% of successful customers, so if you see the Typical APR, you may be more likely to get the rate advertised.

The difference between Fixed APR and Variable APR 

Some of the guarantor lenders we feature on our website offer Fixed and Variable APR. If the rate is fixed it means that the interest rate will not change during the loan term and will always remain the same. This is handy for customers who want to know exactly how much to budget for and what they can expect to pay for their mortgages or loans each month.

Some lenders state that their APR is variable meaning that the interest they charge can go up or down during the loan term. So you could potentially pay more or less for your loan. However, it is very rare for the interest rate to change and is usually only stated as a formality.

In fact, the only guarantor lender to state that their interest rate is variable is Amigo loans and the reason for this is because whilst they have never changed their interest rate, they don’t want to give any surprises to the borrower in case they do. The interest rate, although variable, is unlikely to change drastically though, maybe only be a few per cent here and there.

What determines the APR?

There are several factors that impact the APR:

Type of loan: Some loans have more security than others which is why the rate will vary between different loan products. For instance, a mortgage is a secured loan on a property so if the borrowers cannot keep up with their repayments, the bank or lender can always repossess the estate and sell it to recover their losses. As they have so much security, the interest rates for a mortgage are generally lower at around 1% to 5% each month and this also applies for secured loans in general.

By comparison, something like a payday loan is totally unsecured and the lender has nothing to recover if the borrower does not repay or goes missing. For this reason, the loan provider has to charge a higher rate of interest which is reflected in a higher APR in order to cover the cost of defaults.

Hence, it is not unusual to find that the APR for a payday loan is around 1,000% or higher. Typically if they are keeping within the Financial Conduct Authority’s price cap, they should be charging no more than 0.8% per day, which usually meets at around 1,200% APR. Prior to the price cap, it was common to see APR’s as high as 3,000% and 5,500% for


Length of the loan: APR is calculated as an annual interest rate as though the loan lasts for a year. So for products that last for several years such as mortgages and personal loans, the APR will remain relatively low. But for something like a payday loan which only lasts a few weeks, the interest rate is compounded over and over as though the loan lasts a year, which is why the APR for a payday loan can run in the thousands of percent as per the table above.

The borrower: Some lenders will determine a rate of interest and APR according to the borrower’s individual criteria such as their credit history, income and employment status. This is used to assess an individual’s risk – so for customers with bad credit, they may be charged slightly higher rates to make up for the risk.

Similarly, if a borrower has a good credit history, they may receive lower rates because there is less risk for the lender and this is typical for mortgages. This is very common for mortgages and credit cards. Even for personal loans that are taken out through the likes of Zopa and Ratesetter, you will pay much lower rates if you have a good credit history.

The lender: Every lender has different rates which they calculate based on their own criteria. So prior to applying, it is important that the applicants use our comparison table effectively in order to save money on their loan and find the best product for them.

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