What is APR and How It Can Help Compare Guarantor Loans

Posted: 25th July 2016 15:37

If you are looking for a lender that can offer you the best rate for your guarantor loan, it is important to make yourself well-informed before you take it out. You do not want to get involved in another problem by immediately signing a loan agreement without understanding everything – including the Annual Percentage Rate or the APR.
Unfortunately, most people focus on the interest – not on the APR – when shopping for loan products. But, this is one of the most important factors if you want to compare guarantor loans correctly. When making inquiries and even when they received the fine print (which mentions about the APR), their attention is on the interest rate because they believe that it is the only thing that matters. They make a mistake of not checking the entire computation thus overlooking the APR.
Taking out a Loan: More than just the Payment of Interest
Understanding interest rate is very easy for borrowers to understand. If they loan £50,000 and the interest rate is 5%, this means that they have to pay £2,500 back in interest every year. They are not aware that there’s more to getting a loan than paying for the interest rate – regardless if it is secured or unsecured loan. There are other fees and charges involved. For one, there’s the origination fee, which is charged by the financial institution for the process of the loan. Typically, it is between 0.5% and 1% of the total loan. Origination fee and other charges are included in the APR. Some loans also charge closing cost and insurance cost.
Annual Percentage Rate or APR Explained
The loan charges interest rate, for instance 10% per annum. But the total amount that you need to pay per year is not just the sum of the amount you borrowed and the interest rate. It also includes other charges, such as insurance cost and origination fee. The total cost each year for all of these is called the Annual Percentage Rate or APR. The law states that all lenders or financial institutions must disclose the APR to the borrowers. This disclosure will allow them to make well-informed decisions when loaning cash.
Why Does APR Vary from Lender to Lender?
When you try to compare two lenders, you should not easily choose Lender A over Lender B because it offers lower interest rate. To compare loans effectively, you have to know the true cost through the APR. Aside from the interest rate, all other fees will be included in the computation. Do not be surprised if in the end it is Lender B that offers better loan. The difference between the financial institutions is in the fees – either the fees are lower with Lender B or that it does not charge other fees that Lender A has.
Average APR is estimated at 14%. This is but acceptable, especially if you cannot pay off your loan in a short period of time. Those that offer fixed rates charge below 14%. Variable rates stay close above 14%. Use online APR calculator to verify the accurate APR before you go on signing the loan.