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How to calculate APR on a loan

Written byKoyo Loans
Last Updated18th November 2022
Contents
  • What is APR?
  • What is a representative APR?
  • How to calculate APR on a loan
  • How do I get the best APR for my loan?

For those new to personal loans, APR rates can be confusing. What is an APR? How is it calculated? What is a good APR for your loan? If you’re asking yourself any of these common questions – you’re not alone. This article will take you through what APR is and how it is calculated, helping to make things clearer in the search for a personal loan or credit. 

What is APR?

APR is an acronym that stands for ‘annual percentage rate’. It is the interest rate for a whole year, rather than just a monthly rate. However you borrow money, whether through a personal loan, credit card or overdraft, you will end up paying interest. On top of this interest, you may also have to pay additional costs, such as an annual account fee or origination fee. 

APR gives you a clearer picture of the total cost you pay on your loan each year, including fees, expressed as a percentage. For instance, if you borrowed £2,000 over 12 months with an interest rate of 10% (with zero fees), you will have repaid £200 by the end of the year. 

Sounds simple – right? To make things slightly more complex, let’s look at another example. If you borrow the same yearly amount (£2000) and were charged a lower interest rate of 8%, you would end up paying £160 back by the end of the year. However, if this lender added additional fees of £60, you would be paying back £220 or 11% of the original amount! Despite the lower interest rate, you (the borrower) would end up paying more back than in the second instance.

While it’s worth bearing in mind that interest rates and fees are more complicated in practice, these examples exemplify why APRs are needed for comparing loans with other lenders. APRs are designed to make the yearly costs of your loan easy to understand and simple to compare with other lenders. When it comes to finding the perfect loan for you, they are one of the most important tools you have. 

What is a representative APR?

Representative APRs are not too different from your ‘normal’ APR. A representative APR is a number that is mostly calculated by lenders granting unsecured loans and credit cards. To be more specific, it is a figure that 51% of the people applying for a loan amount and repayment time are likely to be given. While you may fall into the 49% of those who are given a different number, representative APRs give you the best idea of what your annual loan rate will be before application.

How to calculate APR on a loan

So – how exactly does Koyo Loans calculate APRs? As an online lender, we use Open Banking data to determine the rates we set for you. While we will still consider your credit score, the Open Banking process is fairer and more aligned to your real financial situation. Within 48 hours, we could be back to you with a decision on your application and payment into your account, without any hidden fees. 24.9% APR Representative.

However, before you even start the loan application process, our personal loan calculator can give you a detailed and realistic representative APR figure based on your preferences. With loan amounts between £1,500 and £12,000, you can enter the specific amount you want to borrow into our calculator. 

After picking your desired figures, you will easily see the calculated representative APR, total amount payable and monthly repayment number, even before you start the application process. 24.9% APR Representative.

How do I get the best APR for my loan?

Some personal loan rates are based on your own specific financial situation, so you do have some control over getting a good APR rate. Here are some ways to find the best APR for your loan.

Choose the right lender for you

APRs are designed to help you compare and contrast different loan offers from a variety of lenders. Doing some research into various offers will help you find a loan perfect for your financial situation. Remember though – while a representative example gives you a good idea of what your annual rates will be, it’s worth bearing in mind that these could change after the application process is complete. We recommend taking a look through an eligibility calculator to ensure you’re on the right track before applying,

Improve your credit score

Improving your credit score is a great way to enhance your chances of achieving better APR rates. One way of doing this is by keeping on top of all your repayments, ensuring you’re not maxed out on your credit cards and even considering applying for a credit builder card. With a healthier credit score, you could be more likely to receive a better APR rate.

If you are searching for a flexible and fair personal loan between £1,500-12,000, Koyo Loans could be perfect for you. Make use of our loan calculator to determine your representative rate and send an application here today. www.koyoloans.com. 24.9% APR Representative.

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