Comparing Loans using APR

APR stands for Annual Percentage Rate whilst APRC stands for Annual Percentage Rate of Charge. The APR is a requirement to be provided in the case of personal loans and credit cards, whereas the APRC should be provided for mortgages. They are a way to compare offers, but not to calculate monthly repayments or instalments as  they include any additional fees you’ll have to pay and the frequency with which interest is charged on your borrowing. APR and APRC are expressed as a percentage of the amount of the loan granted and, usually, the lower they are, the better the deal for the borrower.

So, to sum it up, the APR and the APRC are not the interest rate charged by the bank or whoever is giving the credit. It is a practical way  of comparing between different offers. If you intend to use the APR or the APRC to compare offers, make sure you compare like-with-like, and exclude variables which should not be taken into account.

As an example:

APR used to compare rival competitor offers on a like-for-like-basis.

Loan A is granted with 6.5% interest rate whilst a loan B is agreed at a lower rate of 6%.

At first, loan A appears to be more expensive than loan B. However, loan A’s additional costs (mainly the annual fee) are far lower those applied for loan B. In the end the total cost of borrowing for loan A is lower than for loan B.

All credit agreements should have a statement of the annual percentage rate of charge and a statement of the conditions under which the APR may be amended.

In the APR/APRC calculation, exclude the following:

  • Charges payable by the consumer if he does not comply with his contractual obligations;

  • Charges to transfer funds and charges for keeping an account;

  • Membership subscriptions to associations or groups arising from agreements separate from the credit agreement;

  • Charges for insurance or guarantees except where these are imposed by the creditor;

  • In the case of home loan agreements, any charges payable to persons other than the creditors; and

  • Charges which would only be payable where the credit is not utilised, or only partly utilised, or where the customer requests a rescheduling of payments, or where the customer repays early.