FinanceTeam

Understanding Typical APRs

When you are looking around for a loan you will no doubt be looking at the various "typical APR" values advertised by companies. (APR stands for Annual Percentage Rate of interest) Companies are required to display their "typical APR" under current regulations, with the aim of allowing customers to compare one loan offer against another.

The intention is an honourable one, but in practice it is not so clear and some companies take advantage of the regulations to their benefit. The legislation itself actually prohibits companies misinterpretting the rules to their advantage but cases are often not clear. In effect the Typical APR shown indicates the interest rate at which the company expects 66% or more of the loans to be made at, if they are generated and completed as a result of that particular advertisement. So you can see there is a lot of room for movement.

Why is there such a wide spread of rates?

Some companies only offer low rate loans to customers with very clean credit records and pass all other business onto other companies - therefore they would like to, and often do, show a low typical APR. But in fact many of the customers who apply for these loans are not eligible and end up being dealt with by a different organisation with a different selection of available loans. Some other companies may process all types of loans, from very low rate loans to higher rate deals - this spread of business forces them to indicate a higher typical APR, whereas all they are doing is in fact servicing a wider part of the market.

So you can see that although the Typical APR is often looked on as a useful guide, it can be very misleading. The best approach is to look at the individual interest on the loan you are offered. Compare that to any offers you have been made and make your decision based on that. The case for using a broker to do all the looking and evaluating for you is a strong one.