When you’re comparing loans, it’s easy to focus on one number: the APR.
After all, if one loan has a lower APR than another, it must be cheaper…right?
Not always.
APR is an important way to compare loans, but it doesn’t tell the whole story. The total cost of borrowing can also depend on how much you borrow, how long you borrow for, and the way the loan is structured.
Understanding what APR does (and doesn’t) tell you can help you choose the loan that’s right for your circumstances.
What is APR and what does it tell you?
APR stands for Annual Percentage Rate.
APR is an annualised rate, including interest and any compulsory charges, which helps you compare the cost of borrowing between loans. Lenders must display the APR so customers can compare loans more easily.
A representative APR is a guide, rather than a guaranteed rate for every borrower. The lender must reasonably expect that at least 51% of the loan agreements resulting from the advert will have that APR or less. Some borrowers may be offered a higher APR.
When is APR most useful?
APR works best when you’re looking at loans with:
- The same loan amount
- The same repayment term
- Similar fees and charges
If everything else is equal, comparing the APR can help you understand which loan is likely to cost less.
Once those factors change, it becomes more difficult to compare loans using APR alone.
Why APR isn’t the only way to compare loans
Imagine you’re comparing two loans, but one has lower repayments because the loan is spread over a longer period.
At first glance, that might seem like the better option. But because you’ll be borrowing for longer, you could end up paying more interest overall.
Likewise, some loans include fees that can affect the APR calculation, which is why it’s worth looking beyond a single percentage while comparing your options.
Don’t forget the total amount repayable
Alongside the APR, it’s worth checking the total amount repayable. This tells you the total amount you would repay over the life of the loan if all repayments are met, including the amount you’ve borrowed and the interest charged. Often, this can give you a clearer picture of the overall cost of borrowing.
Research from the Financial Conduct Authority (FCA) has found that showing customers the total amount they’ll repay alongside the APR can make it easier to understand the real cost of a loan.
Monthly repayments matter too
Choosing a loan isn’t just about the lowest overall cost. It’s also about finding repayments that fit comfortably within your budget.
For some, spreading repayments over a longer period may make home improvements more affordable, even if it means paying more interest over the life of the loan.
The right option will depend on your own circumstances and what works best for you.
Comparing loans? Here’s a simple checklist
When you’re looking at different loans, ask yourself:
- Are the loan amounts the same?
- Are the repayment terms the same?
- What is the APR?
- What will the monthly repayments be?
- What is the total amount repayable?
Looking at all of these together can give you a clearer understanding of the overall cost rather than relying on APR alone.
How Lendology helps
At Lendology, we believe borrowing should be clear and transparent.
That’s why we show you:
- Your APR
- Your monthly repayments
- Your total amount repayable
So, you can understand the costs, compare your options and choose the solution that’s most suitable for your circumstances.
The bottom line
APR is an important tool for comparing loans, but it isn’t the only thing to consider.
Looking at the APR alongside the monthly repayments and the total amount repayable will help you build a fuller picture of what a loan will really cost.
Taking a few extra moments to compare these figures can help you make a more informed decision about which borrowing option is most suitable for your circumstances.
