When you’re looking at loans, one of the most confusing things to get your head around is the annual percentage rate, or APR. We thought it would be helpful to explain some of the main points.

What is APR?

APR is the way lenders, like us, describe the cost of borrowing money over 1 year. It allows you to compare the cost of loans from different lenders.

APR takes into account:

  • the interest rate you will pay
  • how often you make payments
  • plus any other charges

Understanding APR

If a loan has an APR of 99.9% it does not mean that you pay back twice what you borrowed. This is because you pay interest on a balance that goes down as the loan is being repaid.

So each time you make a payment, the balance goes down and we calculate the interest on what is left. The next time you make a payment it reduces again and this continues until you repay the loan. As your payments are the same throughout the loan, you will pay off less of the balance in the early days.

As you can see in the table below, a loan of £500 has a total interest of £200.44 with an APR of 99.9%.

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Loan comparison table

  Places for People
Financial Services
Provident Pounds to
Places for People
Financial Services
Provident Pounds to
Amount of credit £500 £500 £500 £250 £250 £250
Term 52 weeks 52 weeks 12 months 52 weeks 52 weeks 12 months
Regular payment £13.47 £18 £79.48 a month £6.74 £9 £39.74 a month
Total interest £200.44 £436 £453.76 £100.48 £218 £226.88
Interest rate 71.8% fixed Not quoted Not quoted 71.8% fixed Not quoted Not quoted
APR 99.9% APR
299.3% Not quoted 99.9% APR
299.3% Not quoted
Total repaid £700.44 £936 £953.76 £350.48 £468 £476.88
Saving Up to £253.32     Up to £126.40    

Figures correct March 2018
Source: www.providentpersonalcredit.com and www.poundstopocket.co.uk

Loans of less than a year

Even if the loan term is less than a year, the APR shown will be worked out over one year. The APR will still help you to see if the loan is expensive or not, but you could also look at the total credit cost to see exactly how much you will pay back.

Why do small loans have higher APRs than banks?

Big banks don’t often lend less than £1,000 as the amount they would earn is too low to cover the cost. They often only lend to people with high credit scores too. That way they can process loans very cheaply by having a computer carry out the work.

When a small loan is offered, costs include:

  • paying someone to check if the loan is a good idea for the person borrowing the money
  • the cost of the equipment needed to process the loan
  • the risk that some loans may not get fully paid back

Why do small loans have a higher APR than larger loans?

A loan of £500 and a loan of £3000 cost similar amounts for lenders to give out. But the interest paid on £500 will be much less than the interest paid on £3000, so the APR needs to be different to cover the cost.

Why should I consider you?

Not everyone can get the help they need from a bank, building society or credit union. Social, responsible lenders (like us) want to try to help people with less good credit scores get smaller loans.

We charge just enough to cover our costs and much less than expensive pay day and doorstep lenders, who make a profit by charging much more than the cost of the loan. We are not for shareholder profit, which means if we ever do make a profit we use it to help more people.

Still confused?

Carnegie UK Trust has a useful video that explains how APR works. This short clip features actor Michael Sheen. It's great for helping you understand APR on small sums over short terms.

Responsible Finance is the voice of the responsible finance industry. They allow you to find lenders who provide affordable loans at fair rates.

99.9% APR representative. Credit will be offered subject to status. Your rate is fixed for the term of your agreement. Applicants are reminded not to commit any funds to expenditure until a loan decision is made.

Places for People Financial Services Limited is authorised and regulated by the Financial Conduct Authority with firm reference number 663756.

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