What’s The Difference Between Interest & APR?

It’s a common mistake- mixing interest and APR up, or thinking that they’re the same thing. Here, we discuss what each is, their differences and what this means for your loan.

What Is Interest?

When you take out a loan, you’re borrowing money that isn’t yours and so there is a charge for doing so. This is interest and it’s an added cost which is repaid together with the amount borrowed in your loan repayments. Therefore when you repay your loan, you’re also repaying the interest.

What Is An Interest Rate?

An interest rate is the amount you pay shown as a percentage. If you are seen as a ‘low risk’ borrower, for example you have a good credit rating; the interest rate you’ll receive may be less. However, if you have a bad credit rating, you could be seen as ‘high risk’ and therefore may receive a higher interest rate.

What Is Representative APR?

APR stands for Annual Percentage Rate of Charge. It was designed to give customers a way of being able to compare similar loans and decide which loan option is the best for them.

The APR of a loan is the cost of interest plus any other fees which are added to your loan. This could include things like admin fees, insurance costs or broker fees.

When you see a Representative APR rate on an advert, this rate must be the rate which the majority of people applying for a loan, in response to that advert, receive. When we say ‘majority’, we mean 51%. So if you see an advert for a loan, 51% of people who apply for a loan after seeing that advert must get a loan at that APR.

Beware, though. APR rates are calculated over a yearly basis. As some loans, such as those you’d find at Provident, are for a period of weeks or months, the APR can seem a lot higher when compared to loans repaid over a longer term, such as years.

Why Are They Important?

Interest will give you an idea of how much you’re being charged to borrow your loan, whilst APR will enable you to compare one loan with another.  In order to get a full understanding of how much you’ll repay for your loan, you can look at the representative APR of a product.

To understand how much you’re being charged to borrow the money you’ve requested, you should look at the interest of your loan.

We hope that’s helped to clear things up for you guys- get in touch below with any questions!