According to the Financial Conduct Authority (FCA), twenty per-cent of consumers are unaware of how a high or a low APR will affect them. When you take out a loan, you are ‘borrowing’ money from a lender. The interest rate is the charge that the lender places for lending the sum. For example, if you take out a loan for £1000 with 10% interest, you will pay back £1100; this means that you will have paid back the £1000 that you owed, plus a fee of £100 to the lender.
Annual Percentage Rate, abbreviated to APR, is the cost of the loan. This is the original loan amount, plus interest and any associated fees. Miscellaneous fees can include documentation fees, tax and insurance. All lenders have to tell you what their APR is before you sign an agreement. To give an example; an interest rate could be 14% per annum, but the APR is 17%, as the impact of the charges adds the equivalent of 3% interest.
Some finance contracts operate on a ‘flat rate.’ The flat rate is calculated to encompass the rate charged by the lender, tax and any fees. A flat-rate is calculated at at the start of the contract, and is set for the duration of the term. Despite a decrease in the amount to be repayed, each repayment will have the same amount of interest applied to it. For example, if a consumer was to take a loan out for £10,000 at a flat rate of 10%, payable in five installments, over a term of twelve months, the charge for the entire term would be £1000. This would mean that the consumer would pay twelve installments of £916.66. Flat rate only takes into account interest. It does not include documentation or miscellanous fees. At the start of the contract, these will be declared as either an initial or final payment, by your lender.