APR - black art or consumer protector?
APR stands for Annual Percentage Rate of charge. The APR of a credit card determines how much you have to pay each month. Put simply, the APR of a credit card is the monthly interest charge multiplied by twelve months. A simple example of this would be a credit card with an APR of 10.2%. Divided by 12, this would mean that the interest would be 0.85% of your outstanding balance that month. Therefore, monthly interest on a balance of 1000 with 10.2% APR would equal 8.50. The total amount of interest you pay over the year will depend on your outstanding balance and how much you pay off each month. It means that when choosing a credit card, you can use its APR to compare with different cards, but the annual amount of interest you will pay depends on your monthly repayments and balance.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
The second question should be to ask for more detail about any additional charges that are not included in the APR. This brings us into payment protection insurance territory. With some cards, this service is an optional extra, but others insist on its inclusion. It can act as a safeguard should your circumstances change, but if it's something you're willing to forgo then look for cards that offer it as an option, rather than as a non-negotiable inclusion. This is a good time to also ask yourself if you could afford the maximum monthly repayment charges without stretching yourself financially to the limit. If the credit card loan is spread out over a longer period of time, the payments may be lower, but the calculated cost of the overall loan may be higher, as you are paying interest for longer.
Finance and credit lending are considered by many to be a 'dark art', and APR calculation is no exception. Financial regulatory bodies and the Government are aware of the concerns of consumers, and put safeguards in place to ensure lenders comply with strict guidelines including full disclosure. The lenders are happy to comply with this, as it promotes an open and accountable market. APR attempts to create a clearly recognisable interest figure on a loan, showing the consumer exactly how much they can expect to pay. The loan amount doesn't change (in the initial calculation); it's the APR that's the variable (unless you go for a fixed rate option). By doing some research before deciding on a lender, the savvy consumer can find a good credit card deal with an APR rate that suits their finances. Look past the initial 0% sweeteners and at the subsequent APR rate that the credit card loan will incur once the introductory period is over.
Without looking closely at differing APR rates, it is impossible to make quick comparisons between alternative financial products. All companies use different calculations to determine their interest and other charges. To get the best credit card deal, a little research into how each company calculates that interest will save the consumer being lured into an expensive honeytrap by the promise of an initial interest-free period, only to get stung by a high APR once the honey has run out. There are plenty of good deals to be had on credit cards, and a smart consumer will be able to find one that suits both their budget and their requirements.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
The second question should be to ask for more detail about any additional charges that are not included in the APR. This brings us into payment protection insurance territory. With some cards, this service is an optional extra, but others insist on its inclusion. It can act as a safeguard should your circumstances change, but if it's something you're willing to forgo then look for cards that offer it as an option, rather than as a non-negotiable inclusion. This is a good time to also ask yourself if you could afford the maximum monthly repayment charges without stretching yourself financially to the limit. If the credit card loan is spread out over a longer period of time, the payments may be lower, but the calculated cost of the overall loan may be higher, as you are paying interest for longer.
Finance and credit lending are considered by many to be a 'dark art', and APR calculation is no exception. Financial regulatory bodies and the Government are aware of the concerns of consumers, and put safeguards in place to ensure lenders comply with strict guidelines including full disclosure. The lenders are happy to comply with this, as it promotes an open and accountable market. APR attempts to create a clearly recognisable interest figure on a loan, showing the consumer exactly how much they can expect to pay. The loan amount doesn't change (in the initial calculation); it's the APR that's the variable (unless you go for a fixed rate option). By doing some research before deciding on a lender, the savvy consumer can find a good credit card deal with an APR rate that suits their finances. Look past the initial 0% sweeteners and at the subsequent APR rate that the credit card loan will incur once the introductory period is over.
Without looking closely at differing APR rates, it is impossible to make quick comparisons between alternative financial products. All companies use different calculations to determine their interest and other charges. To get the best credit card deal, a little research into how each company calculates that interest will save the consumer being lured into an expensive honeytrap by the promise of an initial interest-free period, only to get stung by a high APR once the honey has run out. There are plenty of good deals to be had on credit cards, and a smart consumer will be able to find one that suits both their budget and their requirements.
About the Author:
Jo Smart is a financial author that enjoys taking time to break down the facts about credit cards and other personal finance options. You can find out more about Low APR Credit Cards and other Credit Cards here.
posted by Debt Consolidation Loan at
8:30 AM
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