Representative Annual Percentage Rate (APR) is a new phenomenon in the loan lending market. Compared to the traditional APR that just covered the interest on a loan, representative APR is designed to provide consumers with a better and clearer idea about what they will be charged when applying for a loan. Introduced in early 2011 to British law, representative APR covers all forms of borrowing. All lenders are compelled to properly advertise the representative APR and need to adhere to it. It will help you to determine the interest rate you will need to pay on your loan with ease.
The main reason behind introducing representative APR is to suspend loan lending companies that advertises one rate to draw in customers but offers a totally diverse rate once one has completed the application procedure. You may have often come across such companies who have offered you interest rates that are far different from the one that you thought you requested. It is believed that with the introduction of representative APR such issues should minimize.
Compared to long term loans, short term loans are more affected by the introduction of representative APR. Calculating rate of interest for short-term solutions is quite a complex process. If you are planning to apply for a short term loan it is necessary that you know exactly how the representative APR of a loan is calculated. The interest rates of short term loans are basically based on a monthly or daily rate. However, APR is not based on that. It is on the contrary an annual rate of interest. Thus, you will have to pay interest of the same amount every month.
As per the representative APR, lenders should base their calculations on the rate achieved by over 66%. It will take into account the rate you pay on monthly basis multiplied by a complete 12 months term. For instance if you take out a £100 loan with a monthly rate of 23.5%, the total repayable amount will be £1258.94. Thus, most companies are nowadays advertising representative APR of 1500%, 2000% and 4000%.
