The following information is taken from http://www.moneysavingexpert.com/banking/interest-rates
Understanding APRs
You can’t avoid APRs. They should appear on every advert offering credit and customers have to be given APR figures whenever they discuss finance with sales representatives. APRs are designed to help make finance less confusing and more transparent – they help customers compare finance rates like-for-like so they can make decisions based on what’s best for them.
APR stands for ‘annual percentage rate’ and, put simply, it’s the price of borrowing. When it comes to APRs most people understand that the lower the APR the better, and that’s broadly true.
APRs & Calculating Interest
When trying to work out likely interest charges, you’d be forgiven for assuming that if you borrowed £1000 at 10% APR then you would have to pay £100 in interest over one year (£1000 x .10 = £100).
But it’s not quite that straightforward, this calculation actually shows how much you would pay if you borrowed £1000 for a full year. It’s also assuming the interest will be calculated just once per year and there are no fees. In fact, you might only borrow money for part of the year (if you choose to pay it back early) and the interest might be calculated daily or monthly (not annually).
When interest is calculated daily, then the interest charges are added to the outstanding balance daily, and because you now have a slightly higher outstanding balance it means the calculated interest will be slightly higher the next day.
To work out a daily rate you would take the APR and divide it by 365 days,
e.g. 0.10 (10%) ÷ 365 = 0.000274.
When the APR is calculated it has to include both the cost of the borrowing and any associated fees that have been included, e.g. set-up fees. Retailers have to tell customers what their APR is before they sign agreements.
Adding fees can make APRs appear a little confusing. It’s possible to have an annual interest rate of 14% but an APR of 17% due to the addition of fees. However, it’s still a true comparison and it still allows customers to compare the cost of credit agreements.
Fixed APR vs Variable APR
A variable APR means the APR can change over time, and the rate can go up or down. With a fixed APR you know exactly what interest rate will be used to calculate interest charges for the life-time of the agreement.
Whenever the term representative APR is used, it means at least 51% of successful applicants will be given the advertised interest rate, but it’s not guaranteed to be the APR offered to everyone.
If you’d like to know more about APRs and how they work, then talk to your Business Development Manager.