APR or annual percentage rate is a figure that all lenders are required to state on their websites, but just because you are used to seeing the term, it doesn’t mean you necessarily know what it means. APR can be misleading when it comes to the true cost of borrowing as it doesn’t always accurately represent the amount of interest you pay in pounds.
APR is an acronym for Annual Percentage Rate. Annual percentage rate is the rate of interest which is charged for your borrowing over one full year. For example, if you borrowed £100 for 12 months and it cost you £150 to repay at the end of the 12 months, then the APR on that loan is 50%.
However, when you make interim payments, for example minimum payments on a credit card, or short term loan instalment payments, you reduce the total amount of loan principal owing each time and so the amount of interest that accrues on your balance will also change. This is why APR can be misleading. It’s one figure which represents an interest rate for one year which means it might not be reflective of the actual amount of interest being applied.
Although a credit line is a revolving credit product which means the borrowing lifecycle can span many years, APR isn’t necessarily an accurate way of calculating the interest you actually pay as you are required to make minimum payments every month which includes the interest that accrued on the preceding statement period, any transaction fees and some of the principal amount borrowed. This means that the amount you have borrowed is constantly changing throughout the year so to apply one hard and fast percentage as a way of calculating how much it costs you won’t always be accurate.
While you shouldn’t ignore the APR when comparing credit lines, there are other, more helpful indicators which can demonstrate how much interest will be applied.
For example, the per annum interest rate, sometimes noted as pa, will help indicate how much daily interest you will be charged. You can calculate the daily interest per £100 by dividing the per annum interest rate by the number of days in the year (365). For example, our representative example on our homepage uses a pa interest rate of 49.9%. So,
49.9/365 = 0.14, which means it will cost 14p per day to borrow £100 on a Polar Credit Line. If you borrowed £300 for example, you multiply the interest amount by 3 (300/100 = 3), to get 42p.
When comparing the cost of borrowing from Polar Credit to other providers, please also remember that we charge a 1.65% transaction fee on your withdrawal.
The annual percentage rate on a Polar Credit line will vary from credit line to credit line. On our website homepage, you’ll see a Representative APR of 68.7%. A Representative APR means that at least 51% of a lender’s customer base has that APR and the other 49% may have a higher or lower APR.
However, as we’ve demonstrated, the pa interest rate is an easier way to see how much your borrowing will cost you. At Polar Credit we value customer loyalty and we have a commitment to provide a sustainable credit product to help our customers manage their cashflow and rebuild their money management skills. This is why we will reduce the pa interest rate on your credit line by 10% after the first year of borrowing with us and then we will reduce the pa rate further by 5% every 6 months after that, until you reach our minimum interest rate of 29.9% pa. The APR will also drop as a result of the reduction in pa interest rate.
So, while a starting pa interest rate of 49.9% will mean you pay 14p per day for every £100 borrowed, at 29.9%pa, this drops to just 8p per day!
Want to find out more? Check out our Info Hub.