Choosing the right loan can be confusing. How do you know if you’re getting a good value loan? Often we are left scratching our heads trying to figure out what is the difference between the ‘interest rate’ and APR on a loan. Many lenders use different words to describe the cost of borrowing but the APR is the best figure to compare. Some interest rates look more enticing and cheaper than others, we aim to explain and make it simple.

Interest rate and APR must be the same?

Unfortunately not, as Troy Segal explained the difference

The interest rate is the cost of borrowing the money. When evaluating the cost of a loan or line of credit, it is important to understand the difference between the advertised interest rate and the annual percentage rate (APR), which includes any additional costs or fees.

Annual Percentage Rate (APR)

The official rate used to help you understand the cost of borrowing. It takes into account the interest rate and additional charges of a credit offer. All lenders have to tell you what their APR is before you sign a credit agreement.

Unlike some lenders, PCCU do not offer different interest rates on loans purely based on your credit history. You will not be charged more or less to borrow money because of your credit score. Also the interest is charged on your decreasing loan balance, so as it decreases – the amount of interest you pay decreases.

Different lenders use different terms for interest on loans, we’ve listed a few but remember by law they have to give you the APR when you sign for credit or a loan. Knowing the what the different terms mean and keeping an eye on the APR could save you lots of money.

Representative APR

You will see this term used by many lenders, including the high-cost lenders through to the high street banks. The representative APR is an advertised rate that at least 51% of those accepted for the credit will get.

Crucially that means that almost half the people who are approved for the loan or credit (49%) may not be eligible for the advertised rate, that means the interest rate will be higher and they will have to pay more. This usually means the lower your credit score is, the cost of borrowing will be higher.

Personal APR

A personal APR is the rate you’re actually given by the lender or bank – this could be the same as the representative rate, or it could be higher, depending on your eligibility. The lender will usually decide what rate to offer you based on how your credit and financial information matches their criteria.

It would be beneficial to know your personal APR with a lender before you shop around, hopefully making it easier to compare, however in many cases to get a personal APR you would have to do a credit check with a lender – which could negatively affect your search for other providers! Some banks suggest that they can provide your personal APR without a credit check but be careful.

At PCCU it is easy to compare loans with other lenders – speak to a member of staff for a free loan valuation today.

Fixed Rate Interest

A fixed rate is simply an interest rate that remains the same throughout the life of the loan or credit. This is often used on mortgages.

What is the difference between interest charged on a reducing balance and flat rate?

Not only do you need to be aware of the terms lenders use for rates but also the difference between a loan where the interest charged is paid on a reducing balance or a flat interest rate.

Flat Interest Rates

Lenders sometimes use a Flat Interest Rate to make a loan look cheaper, but be careful as it does not always make it cheaper than a loan with a higher APR.

The big, and sometimes expensive difference between a flat rate and an APR is that you consistently pay interest on the amount of money that you borrowed at the beginning of the loan throughout its lifetime. It does not take into account any money you have repaid.

Interest charged on a Reducing or Decreasing Balance

A reducing rate or a decreasing balance rate, as the term suggests, is an interest rate that is calculated on the decreasing outstanding loan amount. Each time you make a repayment on the loan, the amount of interest you pay will decrease. Basically, the interest for your next loan payment will be calculated based on the updated unpaid loan amount. This is how the interest on a PCCU loan is calculated.

The key points to remember when comparing loans

While the interest rate determines the cost of borrowing money, the APR is the most effective figure to consider when comparing loans, all UK lenders have to provide the APR when you sign for a loan or take out credit. Although some rates seem temptingly low, whether you would be accepted or are eligible for that rate is questionable.

At PCCU loan quotations are free, we do not charge set-up fees and the interest rate you are charged will not be based on your credit history – you can easily obtain a quote from a member of staff to compare us to other lenders.