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Calculating Annual Percentage Rates

By: Garry Crystal - Updated: 2 Oct 2010 | comments*Discuss
Calculating Annual Percentage Rates

The annual percentage rate (APR) is a useful figure as a quick guide to how much interest will be charged on a loan or any other forms of lending. APR rates can be easily used to compare the cost of different loans. Calculating annual percentage rates is a fairly simply process in as much as the higher the APR the more you will pay on your borrowing. However, hidden extras can add a lot of money onto the overall loan amount.

How the Annual Percentage Rate Works

The APR was introduced as part of the Consumer Credit Act 1974 in order to regulate the amount of interest fees that lenders could charge. The APR is the amount of interest that will be charged on the money you still owe from a loan. The amount you will pay is therefore forever changing and will change as the loan amount decreases. If the APR on a loan is 10% then you will pay 10% of the amount you borrowed every year but as the amount decreases so will your interest payments but the APR figure should not change. Basically if you borrow £1000 over a year at 10% APR then you will pay £100 in interest for that year.

However the APR will not just be calculated on the actual loan amount, there may also be other monetary factors to consider. The loan can have inclusions such as arrangement fees and payment protection insurance added, and these will also be calculated into the figure. If you see an APR for loans that seems amazingly low then remember that there may be a lot additional fees that will up the overall total.

Flat Rate Interest

Always beware of loan offers that give a flat rate of interest instead of the APR. While the flat rate of interest figure can look smaller than the APR, it will work out more expensive in the long run. With APR the interest is charged on any outstanding money that is owed, flat rate is worked out on the original loan price and never varies, no matter how much you have paid back. With flat rate interest you will still be paying back the same amount of interest at the end of loan as you did at the beginning. Car loans often use flat rates of interest, and this type of interest rate is definitely one to avoid if you can.

Savings Interest Rates

Interest rates work both ways and you will be quoted an interest rate when you open a savings account. With savings accounts you are basically giving lenders your money to use as they see fit. In return they will give you an interest rate as a percentage of how much money you have lent them. High interest savings accounts usually work by the customer keeping their money in the account for a set period of time. There is also usually a notice period given before any money can be withdrawn from the account.

Payment Protection Insurance

Remember, when calculating annual percentage rates that in some cases payment protection insurance (PPI) could be one of the biggest expenses. PPI is voluntary but in most cases you will need to tick a box that states you do not want the insurance. Lenders will often make the APR cheaper by adding on the cost to the PPI, so always do your calculations on the overall loan cost with all inclusions. If you think you will not need PPI then simply tick the box to avoid it.

The Borrowing Period and APR

The amount of time you take to repay a loan will also determine the overall amount of APR you pay on your loan. You will be paying the APR on your outstanding debts for every year you have the loan, so the longer the loan is for, the longer you will be paying interest. Also remember that you will be paying interest on the interest. If you can, always try to take short term loans with low or zero percent interest.

Price comparisons sites are a great help when calculating annual percentage rates, they will be able to do the brainwork for you. However, these sites will not usually have any figures for arrangement fees and PPI. Always ask for quotes of the total payable figure when shopping around for a loan, and remember that just because the APR is low doesn’t mean the overall total will be.

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