As a student, you‘re finally starting to spread your wings and gain the independence and financial freedom you’ve always wanted. Since you’re getting to grips with your student loan and will soon be graduating and getting yourself a mortgage, we thought it would be worthwhile to discuss APR and how it works.
APR stands for “Annual Percentage Rate” and is the official yardstick for comparing financial products, so all the rates of all loans and mortgages must be presented in the form of APR. The measure includes all administration fees and the commission to the provider. This is particularly useful for financial products that are long term because APR is based on annual measures of interest. Therefore, APR is a great measure for comparing products like mortgages and 5 year loans, but it can also be used to compare credit cards to ensure you get the best rate.
A student loan offers some of the lowest rates of APR that you’ll find at around 1-2% APR. This is part of a government scheme in the UK to help students pay their way through a higher education and have minimum debt when they graduate.
For when you finish University and want to be looking at car loans or mortgages, it’s important that you understand the difference between typical and representative APR. When a financial product is offered at typical or representative APR, not everybody gets this offer. The representative APR is the rate a lender anticipates to offer to 51% or more of its customers, and the typical APR is offered to two-thirds of customers.
Things that will make the APR vary are the time and length of the financial product. In addition, whether you have good or bad credit will also have an impact as the vendor may decide to offer you a high APR if they believe you are more risky. Things not included in APR are add-ons like PPI (Payment Protection Insurance) and your APR may change depending on whether your loan agreement is based on a fixed or variable basis.
For more information, visit APR Explained, a brand new resource helping making sense of everything APR.
By Daniel Tannenbaum. Find me on Google+
Featured Image: 401(k) 2013