If you are planning to apply for a loan, you should definitely look at the concept of APR. If you do not understand what the APR means, you may have some unpleasant surprises ahead of your loan repayment.
When reporting the cost of a loan, both the interest rate and the annual percentage rate of charge are usually given. These two things are definitely not to be confused with each other, their size can vary greatly.
What is the real annual interest rate on the loan?
The nominal interest rate of a loan only indicates how much the loan amount will increase during the year. However, this does not tell you how much the loan will actually cost the applicant. In fact, apart from the interest, there are usually other costs and charges associated with the loan.
The annual percentage rate of charge takes into account all the costs and charges associated with the loan and has been converted into an interest rate format. The annual percentage rate of charge takes into account various processing costs, advertising costs and opening and service charges.
Thus, with the annual percentage rate of charge you can calculate how much the loan will actually pay you per year. Sometimes trying to make loans look cheap by putting a low nominal interest rate on them and adding all kinds of hidden costs to the loan amount which may be overlooked by some applicants when applying for a loan. However, in addition to the current annual interest rate, you do not need to consider any other fees or hidden charges.
The annual interest rate should always be reported in the same way.
The Consumer Protection Act and EU Directive 98/7 / EC stipulate that all lending companies should declare the annual percentage rate of charge in the same form. The purpose of this rule is to prevent any hidden costs from being added to the cost of the loan, since all so-called ‘hidden costs’ are covered. even hidden costs should be reported at the current annual interest rate of the loan. The idea is also to make it easier for the consumer to compare different loans when the costs of all loans are reported in the same way.
At the level of thought, this rule is a good one, and has attracted a large number of lenders to report the cost of the loan as desired. However, some lenders either fail to declare the annual percentage rate of charge or fail to add any charges to it. Therefore, do not blindly trust that the annual percentage rate stated in the loan terms and conditions is correct, but read the loan terms and conditions carefully.
Some lenders exclude the amount used to guarantee the loan. In such cases, the interest rate quoted on the loan will normally only be valid if a guarantee is obtained for the loan. If there is no guarantor, the borrower must purchase it from, for example, the lender or its partner, and this purchase price of the guarantee is not included in the APR.
What to consider when comparing the APR?
Especially when comparing instant loans, it is worth bearing in mind that the comparison with the actual APR can only be successful if the loan amount and loan term are the same. This means that, for example, real annual interest rates for one-year and three-year loans cannot be compared. It is also worth remembering that some lenders exclude part of the cost of the loan from the current annual interest rate, even though by law it should not. Therefore, you should always read the loan terms carefully.