Understanding loan rates

When you’re searching for a loan, it’s important to understand how loan rates work before you apply. Take a few minutes to find out about APR, to make sure you’re armed with the information you need to move forward with your plans.

APR – or Annual Percentage Rate – refers to the total cost of your borrowing for a year. Importantly, it includes the standard fees and interest you’ll have to pay.

Let’s say you borrow £10,000 over 3 years to buy a car. An APR of 5.5% would include your annual interest rate as well as standard fees payable for the loan. You would then pay 36 monthly repayments of about £301, totalling £10,848.60. This includes the £10,000 you borrowed and £848.60 in interest and fees.

Your repayments are the same every month because of how the interest is calculated. At the start of the loan term, your repayments will include more interest but less of the loan balance. Towards the end of the loan term, your repayments will include less interest but more of the loan balance.

APR can help you compare lending products, such as loans or credit cards, on a like for like basis.

If you search for a loan, say on a price comparison site, the different loan options are often ranked by representative APR. 

The clue is in the word representative’. When a loan is advertised with a representative APR, it means that at least 51% of customers receive a rate that is the same as, or lower than, the representative APR – although not everyone within the 51% will necessarily get the same rate.

It can be easy to assume that the lender with the lowest representative APR you find advertised will give you the best rate. However, when you apply, it’s likely you’ll receive a personal APR based on your circumstances. This could be the same, higher, or lower than the representative APR.

Watch our video for a simple breakdown of APR. It could help you to understand loan rates in more detail before you borrow any money.

When you apply for a loan, it’s likely that the rate you receive will be based on your personal circumstances. It will take into account your credit history and finances, as well as the loan amount and length of your borrowing. This is your personal APR.

It’s important to realise this before you apply – particularly if you’re shopping around based on the representative APRs you see advertised. 

The representative APR is a useful comparison tool, but not necessarily the rate you’ll receive. Indeed, it’s likely that customers will get a personal APR even if they are in the 51% who receive a rate that is the same as, or lower than, the representative APR.

You might not know your personal rate until after you’ve applied for a loan, and simply applying could affect your credit rating.

This is because lenders will usually check your financial background with a credit reference agency before deciding whether to make you a loan offer, and the checks will be recorded on your file. Once you take out a loan, the lender has to update your credit file.

If you bank with us, we might be able to tell you what your personal loan rate could be up front before you apply, with no impact on your credit score.