What is APR?
‘APR’, is an abbreviation for ‘Annual Percentage Rate’, which in simplest words, is the total cost of the amount loaned by you.
Basically, when you borrow money, APR is added to the total amount that you have loaned and have to pay back, which is then calculated on a yearly basis, then divided by 12 months to evaluate the amount you have to pay per month. Lenders, when evaluating APR, add up the interest rate with any administration fees sustained through the processing of a loan. If you borrow a greater sum of money from them, some lenders will decrease APR as the APR that you're offered can also depend on the amount of money that you want to borrow.
Following is an elaborated example that'll help you understand what exactly APR is:
Suppose you want to purchase a car, for which an amount of £20,000 is planned by you to borrow, upon which an APR of 6% is applied that you have to pay back, divided over a period of 4 years. The 6% rate applied will be calculated by your lender that will be added over those 4 years, and added to the £20,000 loaned by you.You’ll have to clear the amount by the total sum divided into 48 instalments that have to be paid on a monthly basis. The decrease in the amount is noticed and kept a record of as you clear each instalment.
However, if you're lucky enough to be provided with any extra benefits in your car finance deal, can lead to a reduction in the amount you have to pay back. e.g some car manufacturers or dealers offer deposit payments. However, APR plays a huge role in determining the total amount you’ll have to pay back.
APR is somehow different from an interest rate because an interest rate can also mean the interest that you earn when you invest your money.
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