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Thinking of taking a loan from Koyo? Whilst APRs can be confusing, it’s important to understand what they mean, and how they impact the cost of a Koyo loan. In this article, we’ll examine how APRs are calculated based on your personal circumstance, and what to watch out for. 

It all starts with the interest rate

Simply speaking, the interest rate is the cost of the money you are borrowing. As an example, if you borrow £100, and the interest rate is 40%, you’ll repay the £100 loan, plus an additional £40 (40%) in interest. 

Loan: £100
Interest rate: 40%
Total repayable: £140

However, this would only be true if you paid off the loan in one lump sum. Keep in mind, most lenders calculate interest based on the outstanding balance each month, so it’s likely the total repayable will be lower than stated above. This would only be true if interest is added (or compounded) to the loan and paid off at the same time.

If you paid the above monthly, over the course of a year, the example would look like this: 

Loan: £100
Interest rate: 40%
Total repayable: £122.97

What about fees? 

Many lenders charge fees for borrowing. Such as daily fees for using an overdraft, or product fees for arranging a mortgage. The same applies to loans.

Loan: £100
Interest rate: 40%
Loan fee: £5
Total repayable: £127.97 (the original interest rate + the £5 loan fee)

Koyo is very transparent with fees, we don’t charge any additional borrowing fees, and will never charge you extra for repaying early. 

Again, as most lenders calculate interest based on the outstanding balance each month, it’s likely the total repayable will be lower than quoted.

Add interest rates and fees together

When you’ve got the interest rate, and added any additional fees, you get an APR (or annual percentage rate). APRs were created so borrowers can easily compare the price of credit from multiple lenders, with multiple products (for example, comparing credit cards to loans to overdrafts).

These APRs give you a true overview of the cost of the borrowing for the year. 

With our example above, if the interest rate was 40% and there were also borrowing fees applied, then the APR would be more like c50.5%.

Loan: £100
Interest rate: 40%
Fees: £5
Total repayable: £127.97
APR: 50.5%

This is the true cost of the loan over the course of a year. It’s worth mentioning, that if this is a lot higher than the interest rate you’ve found, it might be because some lenders quote the cost of their interest monthly, rather than annually, like an APR.

But I’ve seen a Rep APR – what’s that? 

Whilst the above loan example is clear, it’s purely representative. I.e. it’s an example of what the average borrower would pay. This is called a representative APR. 

Representative APRs are the APRs used in advertising, mentioned above. To use these types of APRs, the lenders have to give at least 51% of borrowers that exact APR. However, your own true APR will be personal and based on your individual circumstances. 

Thus, the remaining 49% of borrowers could pay a different APR. If you’ve got bad credit, or you are deemed ‘high-risk’ the interest rate might be 40%, the Rep APR might be 50.5% (with fees), but your quoted APR could be much higher because the lender views you as “higher risk” than others.  At Koyo, we don’t follow this practice. The personalised quote you receive, is locked in at the decision stage. 

Why this all matters

It’s really important to understand the above, so that when you borrow money you know how much it’s costing you. You can use the APR to compare different loan quotes. When doing so. it’s important to compare the APR you have been quoted as opposed to any representative APRs. 

Being new to the country, or new to borrowing can mean that you are either declined credit or given really expensive APRs. That’s why Koyo is a great solution. We offer competitive APRs, through the use of technology (Open Banking).

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